5116b7bfe76f435

PART I

Item 1. Financial Statements

Lake Shore Bancorp, Inc. and Subsidiary


Consolidated Statements of Financial Condition

	March 31,		December 31,
	2013		2012
	(Unaudited)
	(Dollars in thousands, except share data)

Assets
Cash and due from banks	$	6,062	$	7,374
Interest earning deposits		6,792		4,392
Federal funds sold		13,618		7,999
Cash and Cash Equivalents		26,472		19,765
Securities available for sale		160,115		159,368
Federal Home Loan Bank stock, at cost		1,776		1,852
Loans receivable, net of allowance for loan losses 2013 $1,834; 2012 $1,806		272,094		272,933
Premises and equipment, net		9,898		9,685
Accrued interest receivable		1,988		1,802
Bank owned life insurance		14,202		14,124
Other assets		1,662		2,858

Total Assets	$	488,207	$	482,387

Liabilities and Stockholders' Equity
Liabilities
Deposits:
Interest bearing	$	353,818	$	346,065
Non-interest bearing		30,474		32,478
Total Deposits		384,292		378,543
Short-term borrowings		13,650		11,200
Long-term debt		10,250		14,400
Advances from borrowers for taxes and insurance		2,297		3,209
Other liabilities		10,725		8,050
Total Liabilities	$	421,214	$	415,402

Commitments and Contingencies		-		-

Stockholders' Equity
Common stock, $0.01 par value per share, 25,000,000 shares authorized; 6,612,500 shares issued and 5,919,132 shares outstanding at March 31, 2013 and December 31, 2012	$	66	$	66
Additional paid-in capital		27,975		27,973
Treasury stock, at cost (693,368 shares at March 31, 2013 and December 31, 2012)		(6,469)		(6,469)
Unearned shares held by ESOP		(1,940)		(1,961)
Unearned shares held by RRP		(539)		(553)
Retained earnings		43,215		42,468
Accumulated other comprehensive income		4,685		5,461
Total Stockholders' Equity		66,993		66,985
Total Liabilities and Stockholders' Equity	$	488,207	$	482,387

See notes to consolidated financial statements.

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Income


	Three Months Ended
	March 31,
	2013		2012
	(Unaudited)
	(Dollars in thousands, except per share data)
Interest Income
Loans, including fees	$	3,479	$	3,597
Investment securities, taxable		699		1,010
Investment securities, tax-exempt		480		469
Other		3		4
Total Interest Income		4,661		5,080

Interest Expense
Deposits		810		1,081
Short-term borrowings		13		10
Long-term debt		63		147
Other		26		27
Total Interest Expense		912		1,265

Net Interest Income		3,749		3,815

Provision (Credit) for Loan Losses		45		(35)

Net Interest Income after Provision (Credit) for Loan Losses		3,704		3,850

Non-Interest Income
Service charges and fees		393		419
Earnings on bank owned life insurance		78		59
Other		44		43
Total Non-Interest Income		515		521

Non-Interest Expenses
Salaries and employee benefits		1,562		1,537
Occupancy and equipment		492		442
Professional services		350		316
Data processing		157		152
Advertising		91		172
Postage and supplies		75		61
FDIC Insurance		64		66
Other		312		321
Total Non-Interest Expenses		3,103		3,067

Income before Income Taxes		1,116		1,304

Income Tax Expense		210		297
Net Income	$	906	$	1,007

Basic and diluted earnings per common share	$	0.16	$	0.18
Dividends declared per share	$	0.07	$	0.07

See notes to consolidated financial statements.

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income


	Three Months Ended
	March 31,
	2013		2012
	(Unaudited)
	(Dollars in thousands)

Net Income	$	906	$	1,007

Other Comprehensive Loss, net of tax benefit
Unrealized holding losses on securities available for sale, net of tax benefit 2013 $490; 2012 $314		(776)		(498)

Total Comprehensive Income	$	130	$	509

See notes to consolidated financial statements.

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended March 31, 2013 and 2012 (unaudited)


							Unearned		Unearned				Accumulated
			Additional				Shares		Shares				Other
	Common		Paid-In		Treasury		Held by		Held by		Retained		Comprehensive
	Stock		Capital		Stock		ESOP		RRP		Earnings		Income (Loss)		Total
	(In thousands, except share and per share data)
Balance - January 1, 2012	$	66	$	27,987	$	(6,260)	$	(2,046)	$	(606)	$	39,770	$	5,036	$	63,947
Net income		-		-		-		-		-		1,007		-		1,007
Other comprehensive loss, net of tax benefit of $314		-		-		-		-		-		-		(498)		(498)
ESOP shares earned (1,984 shares)		-		(2)		-		21		-		-		-		19
Stock based compensation		-		2		-		-		-		-		-		2
RRP shares earned (978 shares)		-		(5)		-		-		13		-		-		8
Cash dividends declared ($0.07 per share)		-		-		-		-		-		(147)		-		(147)
Balance - March 31, 2012	$	66	$	27,982	$	(6,260)	$	(2,025)	$	(593)	$	40,630	$	4,538	$	64,338

Balance - January 1, 2013	$	66	$	27,973	$	(6,469)	$	(1,961)	$	(553)	$	42,468	$	5,461		66,985
Net income		-		-		-		-		-		906		-		906
Other comprehensive loss, net of tax benefit of $490		-		-		-		-		-		-		(776)		(776)
ESOP shares earned (1,984 shares)		-		-		-		21		-		-		-		21
Stock based compensation		-		2		-		-		-		-		-		2
RRP shares earned (994 shares)		-		-		-		-		14		-		-		14
Cash dividends declared ($0.07 per share)		-		-		-		-		-		(159)		-		(159)
Balance - March 31, 2013	$	66	$	27,975	$	(6,469)	$	(1,940)	$	(539)	$	43,215	$	4,685	$	66,993

See notes to consolidated financial statements.

Lake Shore Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows


	Three Months Ended
	March 31,
	2013		2012
	(Unaudited)
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	906	$	1,007
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of investment securities		153		71
Amortization of deferred loan costs		113		143
Provision (credit) for loan losses		45		(35)
Originations of loans held for sale		(195)		(156)
Proceeds from sales of loans held for sale		195		156
Depreciation and amortization		166		160
Increase in bank owned life insurance, net		(78)		(59)
ESOP shares committed to be released		21		19
Stock based compensation expense		16		10
Increase in accrued interest receivable		(186)		(70)
(Increase) decrease in other assets		(45)		100
Decrease in other liabilities		(901)		(67)
Net Cash Provided by Operating Activities		210		1,279

CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available for sale securities:
Sales		1,410		-
Maturities, prepayments and calls		8,491		7,531
Purchases		(6,592)		(12,324)
Redemptions of Federal Home Loan Bank Stock		76		76
Loan origination and principal collections, net		513		4,192
Additions to premises and equipment		(379)		(180)
Net Cash Provided by (Used in) Investing Activities		3,519		(705)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		5,749		8,184
Net decrease in advances from borrowers for taxes and insurance		(912)		(952)
Net increase in short term borrowings		2,450		6,160
Proceeds from issuance of long-term debt		1,750		-
Repayment of long-term debt		(5,900)		(7,860)
Cash dividends paid		(159)		(147)
Net Cash Provided by Financing Activities		2,978		5,385
Net Increase in Cash and Cash Equivalents		6,707		5,959

CASH AND CASH EQUIVALENTS - BEGINNING		19,765		23,704

CASH AND CASH EQUIVALENTS - ENDING	$	26,472	$	29,663

SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid	$	934	$	1,297
Income taxes paid	$	371	$	238

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Foreclosed real estate acquired in settlement of loans	$	168	$	413
Securities purchased and not settled	$	4,065	$	-

See notes to consolidated financial statements.

Lake Shore Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Nature of Operations and Basis of Presentation

Lake Shore Bancorp, Inc. (the “Company”, “us,” “our”, or “we”) 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 March 31, 2013 and for the three months ended March 31, 2013 and 2012 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 the consolidated statements of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated statement of financial condition at December 31, 2012 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information and to make the financial statements not misleading. 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 Annual Report on Form 10-K for the year ended December 31, 2012. The consolidated results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results for any subsequent period or the entire year ending December 31, 2013.

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, evaluation of impairment of securities and income taxes.

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition as of March 31, 2013 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

Note 2 – New Accounting Standards

The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2013-02, “Comprehensive Income (“Topic 220”): “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). ASU 2013-02 amends existing guidance to require an entity to provide information about amounts reclassified out of other comprehensive income by component. In addition, an entity is required to present, either on the face of the income statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For all other amounts, an entity is required to cross-reference to other disclosures that provided additional detail about these amounts. This guidance is effective for all interim and annual reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have a material impact on the Company’s consolidated financial condition or results of operations.

Note 3 – Investment Securities

The amortized cost and fair value of securities are as follows:


	March 31, 2013
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
		( Dollars In thousands)
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury bonds	$	12,886	$	2,154	$	-	$	15,040
Municipal bonds		52,230		3,999		(7)		56,222
Mortgage-backed securities:
Collateralized mortgage obligations-private label		90		4		-		94
Collateralized mortgage obligations-government sponsored entities		61,339		554		(210)		61,683
Government National Mortgage Association		2,451		231		-		2,682
Federal National Mortgage Association		13,783		858		-		14,641
Federal Home Loan Mortgage Corporation		5,201		395		-		5,596
Asset-backed securities-private label		4,327		546		(889)		3,984
Asset-backed securities-government sponsored entities		145		13		-		158
Equity securities		22		-		(7)		15
	$	152,474	$	8,754	$	(1,113)	$	160,115


	December 31, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
		(Dollars In thousands)
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury bonds	$	12,896	$	2,299	$	-	$	15,195
Municipal bonds		51,666		4,598		-		56,264
Mortgage-backed securities:
Collateralized mortgage obligations-private label		92		2		-		94
Collateralized mortgage obligations-government sponsored entities		57,574		684		(91)		58,167
Government National Mortgage Association		2,607		289		-		2,896
Federal National Mortgage Association		15,232		1,040		-		16,272
Federal Home Loan Mortgage Corporation		5,708		486		-		6,194
Asset-backed securities-private label		4,514		530		(927)		4,117
Asset-backed securities-government sponsored entities		150		13		-		163
Equity securities		22		-		(16)		6
	$	150,461	$	9,941	$	(1,034)	$	159,368

All of our mortgage-backed securities and collateralized mortgage obligations are backed by residential mortgages.

At March 31, 2013 and at December 31, 2012, equity securities consisted of 22,368 shares of Federal Home Loan Mortgage Corporation (“FHLMC”) common stock.

At March 31, 2013 and December 31, 2012, thirty-two municipal bonds with a cost of $10.0 million and fair value of $11.0 million and $11.1 million, respectively, were pledged under a collateral agreement with the Federal Reserve Bank of New York for liquidity borrowing. In addition, at March 31, 2013 and December 31, 2012, five municipal bonds with a cost of $1.1 million and a fair value of $1.2 million were pledged as collateral for customer deposits in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits.

The following tables 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
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(Dollars In thousands)
March 31, 2013
Municipal bonds	$	1,052	$	(7)	$	-	$	-	$	1,052	$	(7)
Mortgage-backed securities		20,125		(188)		1,535		(22)		21,660		(210)
Asset-backed securities -private label		-		-		3,258		(889)		3,258		(889)
Equity securities		-		-		15		(7)		15		(7)

	$	21,177	$	(195)	$	4,808	$	(918)	$	25,985	$	(1,113)


	Less than 12 months				12 months or more				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(Dollars In thousands)
December 31, 2012
Mortgage-backed securities	$	11,800	$	(60)	$	2,623	$	(31)	$	14,423	$	(91)
Asset-backed securities -private label		-		-		3,367		(927)		3,367		(927)
Equity securities		-		-		6		(16)		6		(16)

	$	11,800	$	(60)	$	5,996	$	(974)	$	17,796	$	(1,034)

The Company reviews investment securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”) with formal reviews performed quarterly.

The Company determines whether the unrealized losses are other-than-temporary in accordance with FASB Accounting Standards Codification (“ASC”) Topic 320 “Investments - Debt and Equity Securities.” 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. 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. If the present value of the expected cash flows is less than the amortized book value it is considered a credit loss. The fair 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 fair value and the credit loss is recognized in other comprehensive income, net of taxes.

At March 31, 2013, the Company’s investment portfolio included four municipal bonds and fifteen mortgage-backed securities in the unrealized losses less than twelve months category. The municipal bonds and mortgage-backed securities were not evaluated further for OTTI as the unrealized losses on the individual securities were less than 20% of book value, which management deemed to be immaterial, and the mortgage-backed securities were issued by government sponsored entities. 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.

At March 31, 2013, the Company had one equity security, five mortgage-backed securities and four private-label asset-backed securities in the “unrealized losses twelve months or more” category. The Company’s investment in equity securities is a requirement of its membership with the FHLMC. The equity security was not evaluated further for OTTI, despite the percentage of unrealized losses, due to immateriality.

The five mortgage-backed securities and one of the four private label asset-backed securities in this category were not evaluated further for OTTI, as the unrealized losses were less than 20% of book value. The temporary impairments were due to declines in fair value resulting from changes in interest rates and/or increased credit liquidity spreads since 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.

Three of the four private label asset-backed securities in this category were evaluated further for OTTI, as the unrealized loss was greater than 20% of book value for the individual security, the probability of default is high, or the Company’s analysis indicated a possible loss of principal. The following table provides additional information relating to these private label asset-backed securities as of March 31, 2013 (dollars in thousands):


										Foreclosure/
						Unrealized	Lowest	Delinquent %		OREO/
Security		Book Value		Fair Value		Loss	Rating	Over 60 days	Over 90 days	Bankruptcy %	OREO%
1	$	1,898	$	1,439	$	(459)	C	36.10%	34.70%	16.90%	1.10%
2		1,132		835		(297)	CCC	29.80%	28.20%	10.70%	1.20%
3		1,000		867		(133)	CCC	21.30%	19.40%	11.30%	1.10%
Total	$	4,030	$	3,141	$	(889)

The three private label asset-backed securities listed above were evaluated for OTTI under the guidance of FASB ASC Topic 320. The Company believes the unrealized losses on these three private-label asset-backed securities occurred due to the current challenging economic environment, high unemployment rates, a continued decline in housing values in many areas of the country, and increased delinquency trends. It is possible that principal losses may 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 for the securities listed above did not reflect the need to record an OTTI charge against earnings for the three months ended March 31, 2013. The estimated discounted cash flows for these remaining securities did not show an additional principal loss under various prepayment and default scenarios. Management concluded that it does not intend to sell these securities and that it is not likely it will be required to sell these securities.

Management also completed an OTTI analysis for two private label asset-backed securities, which did not have unrealized losses as of March 31, 2013. Management reviewed key credit metrics for these securities, including delinquency rates, cumulative default rates, prepayment speeds, foreclosure rates, loan-to-value ratios and credit support levels. Management’s calculation of the estimated discounted cash flows did not show additional principal losses for these securities under various prepayment and default rate scenarios. As a result

of the stress tests that were performed, management concluded that additional OTTI charges were not required as of March 31, 2013 on these securities. Management also concluded that it does not intend to sell the securities and that it is not likely it will be required to sell these securities.

The unrealized losses shown in the previous table, were recorded as a component of other comprehensive income, net of tax on the Company’s Consolidated Statements of Changes in Stockholders’ Equity.

The following table presents a summary of the credit-related OTTI charges recognized as components of earnings:


	For the Three Months		For the Three Months
	Ended		Ended
	March 31, 2013		March 31, 2012
	(Dollars in thousands)
Beginning balance	$	1,155	$	1,084
Additions:
Credit loss not previously recognized		-		-
Reductions:
Losses realized during the period on OTTI previously recognized		(7)		(12)
Ending balance	$	1,148	$	1,072

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 available for sale securities are as follows:


	Amortized		Fair
	Cost		Value
	(Dollars in thousands)
March 31, 2013:
After one year through five years	$	286	$	310
After five years through ten years		21,967		24,696
After ten years		42,863		46,256
Mortgage-backed securities		82,864		84,696
Asset-backed securities		4,472		4,142
Equity securities		22		15
	$	152,474	$	160,115

During the three months ended March 31, 2013 and 2012, the Company did not sell any available for sale securities. During the three months ended March 31, 2013, the Company received a $1.4 million settlement related to the sale of available for sale securities in the fourth quarter of 2012.

Note 4 - Allowance for Loan Losses

Management segregates the loan portfolio into loan types and analyzes the risk level for each loan type when determining its allowance for loan losses. The loan types are as follows:

Real Estate Loans:

One- to Four-Family – are loans secured by first lien collateral on residential real estate primarily held in the Western New York region. These loans can be affected by economic conditions and the value of underlying properties. Western New York has not been impacted as severely as other parts of the country by fluctuating real estate prices. Furthermore, the Company has conservative underwriting standards and does not have any sub-prime loans in its loan portfolio.

Home Equity - are loans or lines of credit secured by second lien collateral on owner-occupied residential real estate primarily held in the Western New York area. These loans can also be affected by economic conditions and the values of underlying properties. Home equity loans may have increased risk of loss if the Company does not hold the first mortgage, resulting in the Company being in a secondary position in the event of collateral liquidation.

Commercial Real Estate – are loans used to finance the purchase of real property, which generally consists of developed real estate that is held as first lien collateral for the loan. These loans are secured by real estate properties that are primarily held in the Western New York region. Commercial real estate lending involves additional risks compared with one- to four-family residential lending, because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, and/or the collateral value of the commercial real estate securing the loan, and repayment of such loans may be subject to adverse conditions in the real estate market or economic conditions to a greater extent than one- to four-family residential mortgage loans. Also, commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers.

Construction – are loans to finance the construction of either one- to four-family owner occupied homes or commercial real estate. At the end of the construction period, the loan automatically converts to either a conventional or commercial mortgage, as applicable. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion compared to the actual cost of construction.

Other Loans:

Commercial – includes business installment loans, lines of credit, and other commercial loans. Most of our commercial loans have variable interest rates tied to the prime rate, and are for terms generally not in excess of 10 years. Whenever possible, we collateralize these loans with a lien on business assets and equipment and require the personal guarantees from principals of the borrower. Commercial loans generally involve a higher degree of credit risk because the collateral underlying the loans may be in the form of intangible assets and/or inventory subject to market obsolescence. Commercial loans can also involve relatively large loan balances to a single borrower or groups of related borrowers, with the repayment of such loans typically dependent on the successful operation of the commercial businesses and the income stream of the borrower. Such risks can be significantly affected by economic conditions.

Consumer – consist of loans secured by collateral such as an automobile or a deposit account, unsecured loans and lines of credit. Consumer loans tend to have a higher credit risk due to the loans being either unsecured or secured by rapidly depreciable assets. Furthermore, consumer loan payments are dependent on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

The allowance for loan losses is a valuation account that reflects the Company’s evaluation of the losses inherent in its loan portfolio. In order to determine the adequacy of the allowance for loan losses, the Company estimates losses by loan type using historical loss factors, as well as other environmental factors, such as trends in loan volume and loan type, loan concentrations, changes in the experience, ability and depth of the Company’s lending management, and national and local economic conditions. The Company's determination

as to the classification of our loans and the amount of our loss allowances are subject to review by our regulatory agencies, which can require that we establish additional loss allowances.

The Company also reviews all loans on which the collectability of principal may not be reasonably assured, by reviewing payment status, financial conditions and estimated value of loan collateral. These loans are assigned an internal loan grade, and the Company assigns the amount of loss components to these classified loans based on loan grade.

The following tables summarizes the activity in the allowance for loan losses for the three months ended March 31, 2013 and 2012 and the distribution of the allowance for loan losses and loan receivable by loan portfolio class and impairment method as of March 31, 2013.


	Real Estate Loans								Other Loans
	One- to Four-Family		Home Equity		Commercial		Construction		Commercial		Consumer		Unallocated		Total
	(Dollars in thousands)
March 31, 2012
Allowance for Loan Losses:
Balance – January 1, 2012	$	441	$	125	$	522	$	-	$	265	$	13	$	-	$	1,366
Charge-offs		(6)		-		-		-		(1)		-		-		(7)
Recoveries		1		-		-		-		-		-		-		1
Provision (Credit)		(55)		(59)		197		-		(118)		(3)		3		(35)
Balance – March 31, 2012	$	381	$	66	$	719	$	-	$	146	$	10	$	3	$	1,325

March 31, 2013
Allowance for Loan Losses:
Balance – January 1, 2013	$	393	$	79	$	1,118	$	-	$	202	$	14	$	-	$	1,806
Charge-offs		-		-		-		-		(20)		(4)		-		(24)
Recoveries		-		-		5		-		2		-		-		7
Provision (Credit)		134		(6)		(134)		-		37		11		3		45
Balance – March 31, 2013	$	527	$	73	$	989	$	-	$	221	$	21	$	3	$	1,834
Ending balance: individually evaluated for impairment	$	-	$	-	$	30	$	-	$	20	$	-	$	-	$	50
Ending balance: collectively evaluated for impairment	$	527	$	73	$	959	$	-	$	201	$	21	$	3	$	1,784

Gross Loans Receivable ⁽¹⁾:
Ending balance	$	167,229	$	30,394	$	58,164	$	464	$	13,366	$	1,621	$	-	$	271,238
Ending balance: individually evaluated for impairment	$	-	$	-	$	255	$	-	$	71	$	-	$	-	$	326
Ending balance: collectively evaluated for impairment	$	167,229	$	30,394	$	57,909	$	464	$	13,295	$	1,621	$	-	$	270,912

⁽¹⁾	Gross Loans Receivable does not include allowance for loan losses of $(1,834) or deferred loan costs of $2,690.

The following table summarizes the distribution of the allowance for loan losses and loans receivable by loan portfolio class as of December 31, 2012:


	Real Estate Loans									Other Loans
	One- to Four-Family		Home Equity		Commercial		Construction		Commercial		Consumer		Unallocated		Total
	(Dollars in thousands)

December 31, 2012
Allowance for Loan Losses:
Balance – December 31, 2012	$	393	$	79	$	1,118	$	-	$	202	$	14	$	-	$	1,806
Ending balance: individually evaluated for impairment	$	-	$	-	$	30	$	-	$	20	$	-	$	-	$	50
Ending balance: collectively evaluated for impairment	$	393	$	79	$	1,088	$	-	$	182	$	14	$	-	$	1,756

Gross Loans Receivable ⁽¹⁾:
Ending Balance	$	167,794	$	30,724	$	57,653	$	416	$	13,680	$	1,791	$	-	$	272,058
Ending balance: individually evaluated for impairment	$	-	$	-	$	255	$	-	$	71	$	-	$	-	$	326
Ending balance: collectively evaluated for impairment	$	167,794	$	30,724	$	57,398	$	416	$	13,609	$	1,791	$	-	$	271,732

⁽¹⁾	Gross Loans Receivable does not include allowance for loan losses of $(1,806) or deferred loan costs of $2,681.

Although the allocations noted above are by loan type, the allowance for loan losses is general in nature and is available to offset losses from any loan in the Company’s portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting scheduled payments when due. Impairment is measured on a loan-by-loan basis for commercial real estate loans and commercial loans. Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, home equity, or one- to four-family loans for impairment disclosure, unless they are subject to a troubled debt restructuring.

The following is a summary of information pertaining to impaired loans at or for the periods indicated:


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(Dollars in thousands)
							For the three months ended
	At March 31, 2013						March 31, 2013
With no related allowance recorded:
Commercial real estate	$	125	$	125	$	-	$	125	$	-
With an allowance recorded:
Commercial real estate		130		130		30		130		-
Commercial loans		71		71		20		71		-
Total	$	326	$	326	$	50	$	326	$	-


							For the Year Ended
	At December 31, 2012						December 31, 2012
With no related allowance recorded:
Commercial real estate	$	125	$	125	$	-	$	155	$	3
Commercial loans		-		-		-		50		4
With an allowance recorded:
Commercial real estate		130		130		30		131		7
Commercial loans		71		71		20		73		3
Total	$	326	$	326	$	50	$	409	$	17

The following table provides an analysis of past due loans and non-accruing loans as of the dates indicated:


	Loans past due but still accruing
					90 Days or		Total Past
	30-59 Days		60-89 Days		More		Due and					Current	Total Loans
	Past Due		Past Due		Past Due		Still Accruing		Non-Accrual		Due		Receivable
	(Dollars in thousands)
March 31, 2013:
Real Estate Loans:
Residential, one- to four-family	$	727	$	531	$	108	$	1,366	$	1,766	$	164,097	$	167,229
Home equity		107		19		-		126		206		30,062		30,394
Commercial		571		-		-		571		255		57,338		58,164
Construction		-		-		-		-		-		464		464
Other Loans:
Commercial		14		-		-		14		177		13,175		13,366
Consumer		9		9		-		18		17		1,586		1,621
Total	$	1,428	$	559	$	108	$	2,095	$	2,421	$	266,722	$	271,238

December 31, 2012:
Real Estate Loans:
Residential, one- to four-family	$	1,060	$	353	$	10	$	1,423	$	1,628	$	164,743	$	167,794
Home equity		87		28		-		115		299		30,310		30,724
Commercial		30		-		-		30		255		57,368		57,653
Construction		-		-		-		-		-		416		416
Other Loans:
Commercial		-		-		-		-		201		13,479		13,680
Consumer		20		4		18		42		9		1,740		1,791
Total	$	1,197	$	385	$	28	$	1,610	$	2,392	$	268,056	$	272,058

The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance. Interest income not recognized on non-accrual loans during the three month periods ended March 31, 2013 and March 31, 2012 was $32,000 and $42,000 respectively.

The Company’s policies provide for the classification of loans as follows:

·	Pass/Performing;

·	Special Mention – does not currently expose the Company to a sufficient degree of risk but does possess credit deficiencies or potential weaknesses deserving the Company’s close attention;

Substandard – has one or more well-defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. A substandard asset would be one inadequately protected by the current net worth and paying capacity of the obligor or pledged collateral, if applicable;

·	Doubtful – has all the weaknesses inherent in substandard loans with the additional characteristic that the weaknesses present make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss; and

·	Loss – loan is considered uncollectible and continuance without the establishment of a specific valuation reserve is not warranted.

The Company’s Asset Classification Committee is responsible for monitoring risk ratings and making changes as deemed appropriate. Each commercial loan is individually assigned a loan classification. The Company’s consumer loans, including residential one- to four-family loans and home equity loans, are not classified as described above. Instead, the Company uses the delinquency status as the basis for classifying these loans. Unless the loan is well secured and in the process of collection, all consumer loans that are more than 90 days past due are classified.

The following table summarizes the internal loan grades applied to the Company’s loan portfolio as of March 31, 2013 and December 31, 2012:


	Pass/Performing		Special Mention		Substandard		Doubtful		Loss		Total
	(Dollars in thousands)
March 31, 2013
Real Estate Loans:
Residential, one- to four-family	$	163,614	$	-	$	3,615	$	-	$	.	$	167,229
Home equity		30,107		-		252		35		-		30,394
Commercial		52,124		3,168		2,617		255		-		58,164
Construction		464		-		-		-		-		464
Other Loans:
Commercial		12,624		476		193		73		-		13,366
Consumer		1,598		-		9		9		5		1,621
Total	$	260,531	$	3,644	$	6,686	$	372	$	5	$	271,238


December 31, 2012
Real Estate Loans:
Residential, one- to four-family	$	165,023	$	-	$	2,771	$	-	$	-	$	167,794
Home equity		30,370		-		331		23		-		30,724
Commercial		51,620		3,422		2,481		130		-		57,653
Construction		416		-		-		-		-		416
Other Loans:
Commercial		12,988		441		176		75		-		13,680
Consumer		1,775		-		14		2		-		1,791
Total	$	262,192	$	3,863	$	5,773	$	230	$	-	$	272,058

Troubled debt restructurings (“TDRs”) occur when we grant borrowers concessions that we would not otherwise grant but for economic or legal reasons pertaining to the borrower’s financial difficulties. A concession is made when the terms of the loan modification are more favorable than the terms the borrower would have received in the current market under similar financial difficulties. These concessions may include, but are not limited to, modifications of the terms of the debt, the transfer of assets or the issuance of an equity interest by the borrower to satisfy all or part of the debt, or the addition of borrower(s). The Company identifies loans for potential TDRs primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future. Generally, we will not return a TDR to accrual status until the borrower has demonstrated the ability to make principal and interest payments under the restructured terms for at least six consecutive months.

For the three months ended March 31, 2013 and 2012, 27 and nine one- to four-family real estate loans with aggregate balances of $2.8 million and $558,000, respectively, were modified and not classified as TDRs. These loans were modified for qualified customers, who received a lower interest rate, in order for the Company to maintain the lending relationship and remain competitive in the current low interest rate environment. In addition, there were no TDRs for which there was a payment default during the three months ended March 31, 2013. There was one home equity loan for $31,000 which was modified and classified as a TDR which had a payment default during the three months ended March 31, 2012. Default occurs when a loan is 90 days or more past due and is within 12 months of restructuring.

As of December 31, 2012, one home equity loan for $31,000 as modified and classified was a TDR. This loan was subsequently foreclosed on in March 2013.

Note 5 – Earnings per Share

Earnings per share was calculated for the three months ended March 31, 2013 and 2012, 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 unearned shares held by the Recognition and Retention Plan (“RRP”). 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 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.

The calculated basic and diluted earnings per share are as follows:


	Three Months Ended
	March 31, 2013		March 31, 2012
Numerator – net income	$	906,000	$	1,007,000
Denominator:
Basic weighted average shares outstanding		5,699,579		5,711,344
Increase in weighted average shares outstanding due to ⁽¹⁾:
Stock options		6,365		3,947
Diluted weighted average shares outstanding ⁽¹⁾		5,705,944		5,715,291

Earnings per share:
Basic	$	0.16	$	0.18
Diluted	$	0.16	$	0.18

⁽¹⁾ Stock options to purchase 206,643 shares under the Stock Option Plan at $11.50 per share were outstanding during the three month periods ended March 31, 2013 and 2012, respectively, but were not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive.

Note 6 – 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 as of the dates specified:


	Contract Amount
	March 31,		December 31,
	2013		2012
	(Dollars In thousands)

Commitments to grant loans	$	5,435	$	11,369
Unfunded commitments under lines of credit	$	26,000	$	26,419

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 March 31, 2013 and December 31, 2012, the Company’s fixed rate loan commitments totaled $4.2 million and $8.9 million, respectively. The range of interest rates on these fixed rate commitments was 3.50% to 10.00% at March 31, 2013.

Note 7 – Stock-based Compensation

As of March 31, 2013, the Company had three stock-based compensation plans currently allocated, 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 $32,000, and $29,000 for the three months ended March 31, 2013 and 2012, respectively.

Stock Option Plan

The Company’s 2006 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.

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 common stock on the date of grant and an option’s maximum term is ten years. The stock options generally vest no less than over a five year period.

A summary of the status of the Stock Option Plan as of March 31, 2013 and 2012 is presented below:


	March 31, 2013				March 31, 2012
	Options		Exercise Price	Remaining Contractual Life	Options		Exercise Price	Remaining Contractual Life
Outstanding at beginning of year	236,809	$	11.05		236,809	$	11.05
Granted	-		-		-		-
Forfeited	-		-		-		-
Outstanding at end of quarter	236,809	$	11.05	3 years	236,809	$	11.05	4 years

Options exercisable at end of quarter	227,549	$	11.17	3 years	221,845	$	11.26	4 years

Fair value of options granted			-				-

At March 31, 2013, stock options outstanding had an intrinsic value of $95,000 and 60,753 options remained available for grant under the Stock Option Plan. Compensation expense amounted to $2,000 for the quarters ended March 31, 2013 and 2012. At March 31, 2013, $11,000 of unrecognized compensation cost related to stock options is expected to be recognized over a period of 9 to 21 months.

Recognition and Retention Plan

The Company’s 2006 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.

Awards vest at a rate of 20% per year. As of March 31, 2013 there were 76,699 shares vested or distributed to eligible participants under the RRP. Compensation expense amounted to $9,000 for the quarter ended March 31, 2013, and $8,000 for the quarter ended March 31, 2012. At March 31, 2013, $47,000 of unrecognized compensation cost related to the RRP is expected to be recognized over a period of 9 to 51 months.

A summary of the status of unvested shares under the RRP for the three months ended March 31, 2013 and 2012 is as follows:


	2013		Weighted Average Grant Price	2012		Weighted Average Grant Price
Unvested shares outstanding at beginning of year	10,630	$	7.98	14,304	$	7.92
Granted	-		-	-		-
Vested	(3,975)		7.93	(3,974)		7.93
Forfeited	-		-	-		-
Unvested shares outstanding at end of quarter	6,655	$	8.01	10,330	$	7.92

2012 Equity Incentive Compensation

The Company’s 2012 Equity Incentive Compensation Plan (the “Equity Incentive Plan”), which was approved by the Company’s shareholders on May 23, 2012, permits the grant of restricted stock awards, incentive stock options or non-qualified stock options to employees and non-employee directors for up to 200,000 shares of common stock upon completion of performance goals. As required by federal regulations, awards may not be made under the Equity Incentive Plan until the Federal Reserve Board gives its approval. A request for Federal Reserve Board approval was made in February 2012; however, the Federal Reserve Board has not yet approved or rejected the request. Consequently, awards may not be made under the Equity Incentive Plan until the Federal Reserve Board makes a final determination.

Employee Stock Ownership Plan (“ESOP”)

The Company established the ESOP for the benefit of eligible employees of the Company and the 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 once the employee is eligible to participate in the ESOP. 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 March 31, 2013, the balance of the loan to the ESOP was $2.0 million and the fair value of unallocated shares was $2.0 million. As of March 31, 2013, there were 46,934 allocated shares and 182,504 unallocated shares compared to 45,753 allocated shares and 190,439 unallocated shares at March 31, 2012. The ESOP compensation expense was $21,000 for the quarter ended March 31, 2013, and $19,000 for the quarter ended March 31, 2012 based on 1,984 shares earned in each of those quarters.

Note 8 - Fair Value of Financial Instruments

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 March 31, 2013 and December 31, 2012 and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. 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 can 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.

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’s 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 assets measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2013 and December 31, 2012 were as follows:


	Fair Value Measurements at March 31, 2013
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	March 31, 2013		(Level 1)		(Level 2)		(Level 3)
		(Dollars in thousands)
Measured at fair value on a recurring basis:
Securities available for sale:
U.S. Treasury bonds	$	15,040	$	15,040	$	-	$	-
Municipal bonds		56,222		-		56,222		-
Mortgage-backed securities:
Collateralized mortgage obligations-private label		94		-		94		-
Collateralized mortgage obligations-government sponsored entities		61,683		-		61,683		-
Government National Mortgage Association		2,682		-		2,682		-
Federal National Mortgage Association		14,641		-		14,641		-
Federal Home Loan Mortgage Corporation		5,596		-		5,596		-
Asset-backed securities:
Private label		3,984		-		118		3,866
Government sponsored entities		158		-		158		-
Equity securities		15		-		15		-
Total	$	160,115	$	15,040	$	141,209	$	3,866

Measured at fair value on a non-recurring basis:
Impaired loans	$	181	$	-	$	-	$	181
Foreclosed real estate		303		-		-		303

Any transfers between levels would be recognized as of the actual date of event or change in circumstances that caused the transfer. There were no reclassifications between the Level 1 and Level 2 categories for the three months ended March 31, 2013.


	Fair Value Measurements at December 31, 2012
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	December 31, 2012		(Level 1)		(Level 2)		(Level 3)
		(Dollars in thousands)
Measured at fair value on a recurring basis:
Securities available for sale:
U.S. Treasury bonds	$	15,195	$	15,195	$	-	$	-
Municipal bonds		56,264		-		56,264		-
Mortgage-backed securities:
Collateralized mortgage obligations-private label		94		-		94		-
Collateralized mortgage obligations-government sponsored entities		58,167		-		58,167		-
Government National Mortgage Association		2,896		-		2,896		-
Federal National Mortgage Association		16,272		-		16,272		-
Federal Home Loan Mortgage Corporation		6,194		-		6,194		-
Asset-backed securities:
Private label		4,117		-		244		3,873
Government sponsored entities		163		-		163		-
Equity securities		6		-		6		-
Total	$	159,368	$	15,195	$	140,300	$	3,873

Measured at fair value on a non-recurring basis:
Impaired loans	$	181	$	-	$	-	$	181
Foreclosed real estate		378		-		-		378

Level 2 inputs for assets or liabilities measured at fair value on a recurring basis 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.

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), specifically, asset-backed securities - private label, for the three months ended March 31, 2013 and 2012:


	2013		2012
		(Dollars in thousands)
Beginning Balance	$	3,873	$	3,936
Total gains - realized/unrealized:
Included in earnings		-		-
Included in other comprehensive income		52		56
Total losses - realized/unrealized:
Included in earnings		-		-
Included in other comprehensive income		-		-
Purchases, issuances and settlements		-		-
Sales		-		-
Principal paydowns		(59)		(105)
Transfers to (out of) Level 3		-		-

Ending Balance	$	3,866	$	3,887

Both observable and unobservable inputs may be used to determine the fair value of assets and liabilities measured on a recurring basis that 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.

The following table presents additional quantitative information about the Level 3 inputs for the asset backed securities - private label category. The fair values for this category were developed using the discounted cash flow technique with the following unobservable input ranges as of March 31, 2013 (dollars in thousands):

Unobservable Inputs

Security Category

Fair Value Estimate

Loan Type/Collateral

Credit Ratings

Constant Prepayment Speed (CPR)

Probability of Default (Annual Default Rate)

Loss Severity

Asset-backed securities - private label

3,866

Prime First and Second Lien - Residential Real Estate

CCC thru D

1 - 7

5.0% - 10.5%

70.0% - 100.0%

Level 3 inputs are determined by internal management with inputs from its third party financial advisor on a quarterly basis. The significant unobservable inputs used in the fair value measurement of the reporting entity’s asset-backed, private label securities are prepayment rates, probability of default and loss severity in the event of default. Significant increases or decreases in any of those inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

An impaired loan is carried at fair value based on either recent appraisals less estimated selling costs of related collateral or discounted cash flows based on current market conditions. As of March 31, 2013, impaired loans with a specific allowance had a carrying amount of $201,000 with a valuation allowance of $50,000. The allocated allowance is based on a fair value of $181,000 less estimated liquidation expenses of 7% to 15% of the collateral value, resulting in no additional provision for loan losses during the three month period ended March 31, 2013. As of December 31, 2012 impaired loans with a specific allowance had a gross carrying amount of $201,000 with a valuation allowance of $50,000. The allocated allowance is based on a fair value of

$181,000 less estimated liquidation expenses of 7% to 15% of the collateral value. The use of independent appraisals, discounted cash flow models and management’s best judgment are significant inputs in arriving at the fair value of the underlying collateral and impaired loans are therefore classified within Level 3 of the fair value hierarchy.

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 and which has been subsequently written down during the period. Fair value is based upon independent market prices or appraised value of the property. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement. The use of independent appraisals and management’s best judgment are significant inputs in arriving at the fair value of the underlying collateral and foreclosed real estate is therefore classified within Level 3 of the fair value hierarchy. As of March 31, 2013, foreclosed real estate had a carrying amount of $344,000 and was written down to $277,000 based on a fair value of $303,000 less estimated liquidation expenses of 7% to 15% of the collateral value, resulting in no additional write downs during the three month period ended March 31, 2013. As of December 31, 2012 foreclosed real estate had a carrying amount of $457,000 and was written down to $351,000 based on a fair value of $378,000 less estimated liquidation expenses of 7% to 15% of the collateral value.

The carrying amount and estimated fair value of the Company’s financial instruments, whether carried at cost or fair value, are as follows:


	Fair Value Measurements at March 31, 2013
	Carrying		Estimated		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	26,472	$	26,472	$	26,472	$	-	$	-
Securities available for sale		160,115		160,115		15,040		141,209		3,866
Federal Home Loan Bank stock		1,776		1,776		-		1,776		-
Loans receivable, net		272,094		271,281		-		-		271,281
Accrued interest receivable		1,988		1,988		-		1,988		-

Financial liabilities:
Deposits		384,292		389,209		-		389,209		-
Short-term borrowings		13,650		13,650		-		13,650		-
Long-term debt		10,250		10,472		-		10,472		-
Accrued interest payable		21		21		-		21		-

Off-balance-sheet financial instruments		-		-		-		-		-


	Fair Value Measurements at December 31, 2012
	Carrying		Estimated		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	19,765	$	19,765	$	19,765	$	-	$	-
Securities available for sale		159,368		159,368		15,195		140,300		3,873
Federal Home Loan Bank stock		1,852		1,852		-		1,852		-
Loans receivable, net		272,933		273,202		-		-		273,202
Accrued interest receivable		1,802		1,802		-		1,802		-

Financial liabilities:
Deposits		378,543		383,578		-		383,578		-
Short-term borrowings		11,200		11,200		-		11,200		-
Long-term debt		14,400		14,748		-		14,748		-
Accrued interest payable		43		43		-		43		-

Off-balance-sheet financial instruments		-		-		-		-		-

The following valuation techniques were used to measure the fair value of financial instruments in the above table:

Cash and cash equivalents (carried at cost)

The carrying amount of cash and cash equivalents approximates fair value.

Securities available for sale (carried at fair value)

The fair value of securities available for sale are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1) or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted prices. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, live trading levels, trade execution date, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. Level 2 securities which are fixed income instruments that are not quoted on an exchange, but are traded in active markets, are valued using prices obtained from our custodian, who use third party data service providers. Securities available for sale measured within the Level 3 category consist of private label asset-backed securities. The fair value measurement for these Level 3 securities is explained more fully earlier in this footnote.

Federal Home Loan Bank stock (carried at cost)

The carrying amount of Federal Home Loan Bank stock approximates fair value.

Loans Receivable (carried at cost)

The fair value of fixed-rate and variable rate performing loans is estimated using a discounted cash flow method. The discount rates take into account interest rates currently being offered to customers for loans with similar terms, the credit risk associated with the loan, estimated maturity and market factors including liquidity. The estimate of maturity is based on the Company’s contractual cash flows adjusted for prepayment estimates based on current economic and lending conditions. Fair value for significant nonperforming loans is based on carrying value which does not exceed recent external appraisals of any underlying collateral. Due to the significant judgment involved in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.

Accrued Interest Receivable and Payable (carried at cost)

The carrying amount of accrued interest receivable and payable approximates fair value.

Deposits (carried at cost)

The fair value of deposits with no stated maturity, such as savings, money market and checking is the amount payable on demand at the reporting date and are classified within Level 2 of the fair value hierarchy. The fair value of time deposits is based on the discounted value of contractual cash flows at current rates of interest for similar deposits using market rates currently offered for deposits of similar remaining maturities. Due to the minimal amount of unobservable inputs involved in evaluating assumptions used for discounted cash flows of time deposits, these deposits are classified within Level 2 of the fair value hierarchy.

Borrowings (carried at cost)

The fair value of long-term debt was calculated by discounting scheduled cash flows at current market rates of interest for similar borrowings through maturity of each instrument. Due to the minimal amount of unobservable inputs involved in evaluating assumptions used for discounted cash flows of long-term debt, they are classified within Level 2 of the fair value hierarchy. The carrying amount of short term borrowings approximates fair value of such liability.

Off-Balance Sheet Financial Instruments (disclosed at cost)

Fair values of the Company’s off-balance sheet financial instruments (lending commitments) are based on fees currently charged to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing. Other than loan commitments, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition.

Note 9 – Treasury Stock

During the quarter ended March 31, 2013, the Company did not repurchase any common stock. As of March 31, 2013, there were 71,510 shares remaining to be repurchased under the existing stock repurchase program.

During the quarter ended March 31, 2012, the Company did not repurchase any common stock. As of March 31, 2012, there were 91,510 shares remaining to be repurchased under the existing stock repurchase program.

Note 10 – Subsequent Events

On April 24, 2013, the Board of Directors declared a quarterly dividend of $0.07 per share on the Company’s common stock, payable on May 21, 2013 to shareholders of record as of May 7, 2013. Lake Shore, MHC, which holds 3,636,875 shares, or approximately 61.4% of the Company’s total outstanding stock, elected to waive its right to receive this cash dividend of approximately $255,000. On March 25, 2013, the MHC received the non-objection of the Federal Reserve Bank of Philadelphia to waive its right to receive dividends paid by the Company during the twelve months ending February 26, 2014, aggregating up to $0.28 per share. The MHC waived $255,000 of dividends during the three months ended March 31, 2013. Cumulatively, Lake Shore, MHC has waived approximately $4.7 million of cash dividends as of March 31, 2013. The dividends waived by Lake Shore, MHC are considered a restriction on the retained earnings of the Company.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may be identified by words such as “believe,” “will,” “expect,” “project,” “may,” “could,” “anticipate,” “estimate,” “intend,” “plan,” “targets” and similar expressions. These statements are based upon our current beliefs and expectations and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements as a result of numerous factors.

The following factors, including the factors set forth in Part II, Item 1A of this and previous Quarterly Reports on Form 10-Q and in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements:

Ÿ	general and local economic conditions;

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

Ÿ	the ability of our customers to make loan payments;

Ÿ	our ability to continue to control costs and expenses;

Ÿ	changes in accounting principles, policies or guidelines;

Ÿ	our success in managing the risks involved in our business;

Ÿ	inflation, and market and monetary fluctuations;

Ÿ	the transfer of supervisory and enforcement authority over savings banks to the Office of the Comptroller of the Currency and savings and loan holding companies to the Federal Reserve Board;

Ÿ	changes in legislation or regulation, including the implementation of the Dodd-Frank Act; and

Ÿ	other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.

Any or 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 statements 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 March 31, 2013 compared to the financial condition as of December 31, 2012 and the consolidated results of operations for the three months ended March 31, 2013 and 2012.

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 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 fees and gains and losses on 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, professional fees, and other general and administrative expenses.

Financial institutions like us, in general, are significantly affected by economic conditions, competition and the monetary and fiscal policies of the federal government. Lending activities are influenced by the demand for and supply of housing, 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.

While the recession is officially over, continued weakness in the housing markets and high unemployment remain. These weaknesses can have a negative effect on a bank’s earnings and liquidity. The Federal Reserve is still actively working on keeping interest rates at very low levels. The Fed Funds rate has remained at 0.00%-0.25% for more than four years. The Federal Reserve recently started to become more open and transparent in regards to the discussions held in their meetings, resulting in recent indications that the Fed Funds rate will remain low and will not increase until mid-2015, longer than previously anticipated. Furthermore, the Federal Reserve has been purchasing up to $85 billion in mortgage-backed securities and treasuries on a monthly basis in an effort to stimulate the economy by putting downward pressure on longer-term interest rates.

As discussed in the Company’s Annual Report on Form 10-K Part I, Item 1 “Business – Supervision and Regulation” for the year ended December 31, 2012, since October 2008, numerous legislative actions, including the Dodd-Frank Act, have been taken in response to the financial crisis affecting the banking system and financial markets. While we do not know all the possible outcomes from these initiatives, we can anticipate that the Company will need to dedicate more resources to ensure compliance with the new legislation and regulations, which may impact profitability. There can be no assurance as to the actual impact any governmental program will have on the financial markets or our financial condition and results of operations. We remain active in monitoring these developments and supporting the interests of our shareholders.

Management Strategy

Our Reputation. Our primary management strategy has been to retain our perceived image as one of the most respected and recognized community banks in Western New York with over 121 years of service to our community. Our management strives to accomplish this goal by continuing to emphasize our high quality customer service and financial strength.

Branching. We opened our sixth branch office in Erie County, New York during the second quarter of 2013. This branch is located in Snyder, New York and is our eleventh branch overall. In April 2010, we opened a branch office in Depew, New York. This office had generated deposits of $19.6 million as of March 31, 2013. Our offices are located in Dunkirk, Fredonia, Jamestown, Lakewood and Westfield in Chautauqua County, New York and in Depew, East Amherst, Hamburg, Kenmore, Orchard Park and Snyder in Erie County, New York. Saturation of the market in Chautauqua County led to our expansion plan in Erie County, which is a critical component of our future profitability and growth.

An important strategic objective is to continue to evaluate the technology supporting our customer service. We are committed to making investments in technology and we believe that it represents an efficient way to deploy

a portion of our capital. To this end, the Company has developed a five year plan for the implementation of cost effective and efficient digital services to meet our customer’s technology needs, to focus on attracting new customers, and to improve our operational efficiencies. Although we remain committed to expanding our retail branch footprint whenever it makes strategic sense, we will be concentrating our near term efforts on developing “clicks” instead of “bricks.”

Our People. A large part of our success is related to customer service and customer satisfaction. Having employees who understand and value our clientele and their business is a key component to our success. We believe that our present staff is one of our competitive strengths, and thus the retention of such persons and our ability to continue to attract quality personnel is a high priority.

Residential Mortgage and Other Lending. Historically, our lending portfolio has consisted predominately of residential one- to four-family mortgage loans. At March 31, 2013 and December 31, 2012, we held $167.2 million and $167.8 million of residential one- to four-family mortgage loans, respectively, which constituted 61.7% of our total loan portfolio, at such respective dates. We originate commercial real estate loans to finance the purchase of real property, which generally consists of developed real estate. At March 31, 2013 and December 31, 2012, our commercial real estate loan portfolio consisted of loans totaling $58.2 million and $57.7 million respectively, or 21.4% and 21.2%, respectively, of total loans. In addition to commercial real estate loans, we also engage in small business commercial lending, including business installment loans, lines of credit, and other commercial loans. At March 31, 2013 and December 31, 2012, our commercial loan portfolio consisted of loans totaling $13.4 million and $13.7 million, respectively, or 4.9% and 5.0%, respectively, of total loans. Other loan products offered to our customers include home equity loans and lines of credit, construction loans and consumer loans, including automobile loans, overdraft lines of credit and share loans. We may sell one-to four-family residential loans in the future as part of our interest rate risk strategy and asset/liability management, if it is deemed appropriate. We typically retain servicing rights when we sell one- to four-family residential mortgage loans. One- to four-family residential mortgage loans will continue to be the dominant type of loan in our lending portfolio.

Investment Strategy. Our investment policy is designed primarily to manage the interest rate sensitivity of our assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity within established guidelines. We employ a third party financial advisor to assist us in managing our investment portfolio and developing balance sheet strategies.

At March 31, 2013 and December 31, 2012, we had $160.1 million and $159.4 million, respectively, invested in securities available for sale, the majority of which are agency mortgage-backed securities, agency collateralized mortgage obligation securities (“CMOs”) and municipal securities.

Asset-Liability Strategy. As stated above, our business consists primarily of originating one- to four-family residential mortgage loans and commercial real estate loans secured by property in our market area and investing in residential mortgage-backed securities, CMOs and municipal securities. Typically, one- to four-family residential mortgage loans involve a lower degree of risk and carry a lower yield than commercial real estate and commercial business loans. Our loans are primarily funded by time deposits and core deposits (i.e. checking, savings and money market accounts). This has resulted in our being vulnerable to increases in interest rates, as our interest-bearing liabilities will mature or re-price more quickly than our interest-earning assets in a rising rate environment. Although we plan to continue to originate one- to four-family residential mortgage loans going forward, we have been and intend to continue to increase our focus on the origination of commercial real estate loans and commercial business loans, which generally provide higher returns and have shorter durations than one- to four-family residential mortgage loans. Furthermore, our interest rate risk strategy involves improving our funding mix by increasing our core deposits in order to help reduce and control our cost of funds. We value core deposits because they represent longer-term customer relationships as well as lower cost of funds. As part of our strategy to expand our commercial loan portfolio, we expect to attract lower cost core deposits as part of these borrower relationships. We offer competitive rates on a variety of deposit products to meet the needs of our customers and we promote long term deposits, where possible, to meet asset-liability goals.

We are actively involved in managing our balance sheet through the direction of our Asset-Liability committee and the assistance of a third party advisor. Recent economic conditions have underscored the importance of a strong balance sheet. We strive to achieve this through managing our interest rate risk and maintaining strong capital levels, putting aside adequate loan loss reserves and keeping liquid assets on hand. Diversifying our asset mix not only improves net interest margin but also reduces the exposure of our net interest income and earnings to interest rate risk. We will continue to manage our interest rate risk by diversifying the type and maturity of our assets in our loan and investment portfolios and monitoring the maturities in our deposit portfolio and borrowing facilities.

Critical Accounting Policies

It is management’s opinion that accounting estimates covering certain aspects of our business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity required in making such estimates. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the uncertainty in evaluating the level of the allowance for loan losses required for probable credit losses and the material effect that such judgments can have on the results of operations. Management’s monthly evaluation of the adequacy of the allowance considers our historical loan loss experience, review of specific loans, current economic conditions, and such other factors considered appropriate to estimate loan losses. Management uses presently available information to estimate probable losses on loans; however, future additions to the allowance may be necessary based on changes in estimates, assumptions, or economic conditions. Significant factors that could give rise to changes in these estimates include, but are not limited to, changes in economic conditions in our local area, concentrations of risk and decline in local property values. The Company's determination as to the amount of its allowance for loan losses is subject to review by its regulatory agencies, which can require that we establish additional loss allowances. Refer to Note 4 of the Notes to Consolidated Financial Statements for more information on the allowance for loan losses.

In management’s opinion, the accounting policy relating to the valuation of investments is a critical accounting policy. The fair values of our investments are determined using public quotations, third party dealer quotes, pricing models, or discounted cash flows. Thus, the determination may require significant judgment or estimation, particularly when liquid markets do not exist for the item being valued. The use of different assumptions for these valuations could produce significantly different results which may have material positive or negative effects on the results of our operations. Refer to Note 8 of the Notes to Consolidated Financial Statements for more information on fair value.

Management also considers the accounting policy relating to the impairment of investments to be a critical accounting policy due to the subjectivity and judgment involved and the material effect an impairment loss could have on the consolidated results of income. The credit portion of a decline in the fair market value of investments below cost deemed to be other-than-temporary may be charged to earnings resulting in the establishment of a new cost basis for an asset. Management continually reviews the current value of its investments for evidence of OTTI. Refer to Note 3 of the Notes to Consolidated Financial Statements for more information on OTTI.

These critical policies and their application are reviewed periodically by our Audit Committee and our Board of Directors. All accounting policies are important, and as such, we encourage the reader to review each of the policies included in the notes to our audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2012 to better understand how our financial performance is reported.

Analysis of Net Interest Income

Net interest income represents the difference between the interest we earn on our interest-earning assets, such as mortgage loans and investment securities, and the expense we pay on interest-bearing liabilities, such as

time deposits and borrowings. Net interest income depends on both the volume of our interest-earning assets and interest-bearing liabilities and the interest rates we earn or pay on them.

Average Balances, Interest and Average Yields. The following table sets forth certain information relating to our average balance sheets and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities, interest earned and interest paid for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods indicated. 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. Interest income on securities does not include a tax equivalent adjustment for bank qualified municipals.


	For the Three Months Ended					For the Three Months Ended
	March 31, 2013					March 31, 2012
	Average		Interest Income/		Yield/	Average		Interest Income/		Yield/
	Balance		Expense		Rate	Balance		Expense		Rate
	(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds sold	$	15,037	$	3	0.08%	$	20,897	$	4	0.08%
Securities		158,753		1,179	2.97%		167,187		1,479	3.54%
Loans		272,079		3,479	5.11%		271,705		3,597	5.30%
Total interest-earning assets		445,869		4,661	4.18%		459,789		5,080	4.42%
Other assets		33,841					30,471
Total assets	$	479,710				$	490,260

Interest-bearing liabilities
Demand & NOW accounts	$	41,298	$	12	0.12%	$	40,447	$	13	0.13%
Money market accounts		70,146		65	0.37%		60,536		82	0.54%
Savings accounts		37,232		10	0.11%		33,958		13	0.15%
Time deposits		198,567		723	1.46%		218,301		973	1.78%
Borrowed funds		24,890		76	1.22%		33,245		157	1.89%
Other interest-bearing liabilities		1,193		26	8.72%		1,238		27	8.72%
Total interest-bearing liabilities		373,326		912	0.98%		387,725		1,265	1.31%
Other non-interest bearing liabilities		39,046					37,397
Stockholders' equity		67,338					65,138
Total liabilities & stockholders' equity	$	479,710				$	490,260
Net interest income			$	3,749				$	3,815
Interest rate spread					3.20%					3.11%
Net interest margin					3.36%					3.32%

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


	Three Months Ended March 31, 2013
	Compared to
	Three Months Ended March 31, 2012
	Rate		Volume			Net Change
	(Dollars in thousands)
Interest earning assets:
Interest-earning deposits & federal funds sold	$	-	$	(1)	$	(1)
Securities		(228)		(72)		(300)
Loans, including fees		(123)		5		(118)
Total interest-earning assets		(351)		(68)		(419)

Interest-bearing liabilities:
Demand & NOW accounts		(1)		-		(1)
Money market accounts		(29)		12		(17)
Savings accounts		(4)		1		(3)
Time deposits		(167)		(83)		(250)
Total deposits		(201)		(70)		(271)

Other interest-bearing liabilities:
Borrowed funds & other		(47)		(35)		(82)

Total interest-bearing liabilities		(248)		(105)		(353)

Total change in net interest income	$	(103)	$	37	$	(66)

Our earnings may be adversely impacted by an increase in interest rates because the majority of our interest-earning assets are long-term, fixed rate mortgage-related assets that will not reprice as long-term interest rates increase. As rates rise, we expect loan applications to decrease, prepayment speeds to slowdown and the interest rate on our loan portfolio to remain static. Conversely, a majority of our interest-bearing liabilities have much shorter contractual maturities and are expected to reprice, resulting in increased interest expense. A significant portion of our deposits have no contractual maturities and are likely to reprice quickly as short-term interest rates increase. Therefore, in an increasing rate environment, our cost of funds is expected to increase more rapidly than the yields earned on our loan portfolio and securities portfolio. An increasing rate environment is expected to cause a decrease in our net interest rate spread and a decrease in our earnings. In order to mitigate this effect, the Bank’s Asset-Liability Committee is continuing to review its options in relation to core deposit growth, implementation of new products, promotion of adjustable rate commercial loan products and use of derivative products.

In a decreasing interest rate environment, our earnings may increase or decrease. If long-term interest-earning assets do not reprice and interest rates on short-term deposits begin to decrease, earnings may rise. However,

low interest rates on loan products may result in an increase in prepayments, as borrowers refinance their loans. If we cannot re-invest the funds received from prepayments at a comparable spread, net interest income could be reduced. Also, in a falling interest rate environment, certain categories of deposits may reach a point where market forces prevent further reduction in interest paid on those products. The net effect of these circumstances is reduced net interest income and possibly net interest rate spread.

In the current environment, rates on the lending and investment portfolios have declined significantly, but rates on deposit products and borrowed funds have also dropped, which has assisted in keeping our interest rate spread at a moderate level.

For the three months ended March 31, 2013, the average yields on our loan portfolio and investment portfolio were 5.11% and 2.97%, respectively, in comparison to 5.30% and 3.54%, respectively, for the three months ended March 31, 2012. Overall, the average yield on our interest earning assets decreased by 24 basis points to 4.18% for the three months ended March 31, 2013 in comparison to the three months ended March 31, 2012. For the three months ended March 31, 2013, the average rate that we were paying on interest-bearing liabilities decreased by 33 basis points to 0.98% in comparison to the same period in the prior year. This was partially due to a 67 basis point decrease in the average interest rate paid on our borrowings from 1.89% for the three months ended March 31, 2012 to 1.22% for the three month period ended March 31, 2013 and a 32 basis point decrease in the average rate paid on time deposits from 1.78% for the three month period ended March 31, 2012 to 1.46% for the three month period ended March 31, 2013. Our interest rate spread for the three months ended March 31, 2013 was 3.20%, which was a 9 basis point increase in comparison to the three months ended March 31, 2012. Our net interest margin was 3.36% and 3.32% for the three months ended March 31, 2013 and 2012, respectively.

Comparison of Financial Condition at March 31, 2013 and December 31, 2012

Total assets at March 31, 2013 were $488.2 million, an increase of $5.8 million, or 1.2%, from $482.4 million at December 31, 2012. The increase in total assets was primarily due to a $6.7 million increase in cash and cash equivalents and a $747,000 increase in securities available for sale, partially offset by a $1.2 million decrease in other assets and an $839,000 decrease in net loans receivable.

Cash and cash equivalents increased by $6.7 million, or 33.9%, from $19.8 million at December 31, 2012 to $26.5 million at March 31, 2013. The increase was primarily attributed to a $5.6 million increase in federal funds sold as a result of a $5.7 million increase in deposits, which have not yet been fully utilized to fund loan originations or to purchase securities available for sale.

Securities available for sale increased $747,000, or 0.5%, to $160.1 million at March 31, 2013 compared to $159.4 million at December 31, 2012. During the three month period ended March 31, 2013, the Company purchased $10.7 million of available for sale securities, consisting of collateralized mortgage obligations and municipal bonds. The purchases were partially funded by the receipt of $8.5 million in pay-downs on the investment portfolio with the remainder being funded by deposit growth. The change in the mark to market value of the securities available for sale portfolio between December 31, 2012 and March 31, 2013 was a net loss of $1.3 million.

Net loans receivable had a slight decrease during the three month period ended March 31, 2013, as shown in the table below:


	At March 31,		At December 31,		Change
	2013		2012		$		%
	(Dollars in thousands)
Real Estate Loans:
Residential, one- to four-family	$	167,229	$	167,794	$	(565)	(0.3)	%
Home equity		30,394		30,724		(330)	(1.1)	%
Commercial		58,164		57,653		511	0.9	%
Construction		464		416		48	11.5	%

Total real estate loans		256,251		256,587		(336)	(0.1)	%

Other Loans:
Commercial		13,366		13,680		(314)	(2.3)	%
Consumer		1,621		1,791		(170)	(9.5)	%

Total gross loans		271,238		272,058		(820)	(0.3)	%
Allowance for loan losses		(1,834)		(1,806)		(28)	1.6	%
Net deferred loan costs		2,690		2,681		9	0.3	%

Loans receivable, net	$	272,094	$	272,933	$	(839)	(0.3)	%

The slight decrease in net loans receivable was primarily due to a decrease in all loan categories except for commercial real estate and construction. During 2013, we remain strategically focused on increasing our commercial real estate and commercial loan portfolios to diversify our asset mix, to take advantage of the opportunities available to serve small businesses in our market area, and to maintain an effective net interest margin. During the first quarter of 2013, the Company continued its strategic decision to not match lower rates offered by our competitors on residential one- to four-family loans in an effort to avoid increased interest rate risk. Management continues to look for high quality loans to add to its portfolio and will continue to emphasize loan originations to the extent that it is profitable and prudent.

Other assets decreased by $1.2 million, or 41.8%, to $1.7 million as of March 31, 2013 in comparison to $2.9 million at December 31, 2012. The decrease was primarily due to the sale of $1.4 million of available for sale securities in the fourth quarter of 2012, which settled during the first quarter of 2013.

The table below shows changes in deposit balances by type of deposit between March 31, 2013 and December 31, 2012:


	At March 31,		At December 31,		Change
	2013		2012		$		%
	(Dollars in thousands)
Demand deposits and NOW accounts:
Non-interest bearing	$	30,474	$	32,478	$	(2,004)	(6.2)	%
Interest bearing		42,627		42,350		277	0.7	%
Money market		73,771		68,228		5,543	8.1	%
Savings		38,211		36,990		1,221	3.3	%
Time deposits		199,209		198,497		712	0.4	%

Total deposits	$	384,292		378,543		5,749	1.5	%

The growth in money market and savings accounts was the result of the Company’s continued strategic focus on growing core deposits among its retail and commercial customers. This was partially offset by a decrease in non-interest bearing checking accounts as customers used funds for necessary purchases or transferred funds to an interest bearing deposit account.

Our borrowings, consisting of advances from the Federal Home Loan Bank of New York (“FHLBNY”), decreased by $1.7 million, or 6.6%, from $25.6 million at December 31, 2012 to $23.9 million at March 31, 2013. Long-term debt decreased $4.2 million, or 28.8%, from $14.4 million at December 31, 2012 to $10.3 million at March 31, 2013. Short-term borrowings increased $2.5 million, or 21.9%, from $11.2 million at December 31, 2012 to $13.7 million at March 31, 2013. As long-term debt matured, the Company paid off $1.7 million of such debt in order to reduce interest expense, and the remaining proceeds were transferred into short-term borrowings to take advantage of lower interest rates.

Total stockholders’ equity was $67.0 million at March 31, 2013 and December 31, 2012, reflecting $906,000 of net income in the first quarter of 2013, partially offset by a $776,000 decrease in unrealized gains on available for sale securities (after taxes) and a $159,000 cash dividend payment.

Comparison of Results of Operations for the Three Months Ended March 31, 2013 and 2012

General. Net income was $906,000 for the three month period ended March 31, 2013, or $0.16 per diluted share, a decrease of $101,000, or 10.0%, compared to net income of $1.0 million, or $0.18 per diluted share, for the three month period ended March 31, 2012. The decrease in net income was primarily due to a $66,000 decrease in net interest income, an $80,000 increase in the provision for loan losses, a $6,000 decrease in non-interest income and a $36,000 increase in non-interest expenses, partially offset by an $87,000 decrease in income tax expense.

Interest Income. Interest income decreased by $419,000, or 8.3%, to $4.7 million for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012. Loan interest income decreased by $118,000, or 3.3%, to $3.5 million for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, due to a decrease in average yield from 5.30% for the three month period ended March 31, 2012 to 5.11% for the three month period ended March 31, 2013. The average yield on the loan portfolio decreased as new loans were originated or existing loans were refinanced at lower yields than the rates earned on loans which had paid off, as a result of the current low interest rate environment. Investment interest income decreased by $300,000, or 20.3%, to $1.2 million for the three month period ended March 31, 2013 compared to $1.5 million for the three month period ended March 31, 2012 due to a decrease in the average yield from 3.54% for the three month period ended March 31, 2012 to 2.97% for the three month period ended March 31, 2013. The average yield on the investment portfolio decreased as new securities were purchased at lower yields than the rates earned on securities which had paid off, as a result of the current low interest rate environment. The average balance of the investment portfolio decreased from $167.2 million at March 31, 2012 to $158.8 million at March 31, 2013 primarily due to paydowns which have not yet been re-invested.

Interest Expense. Interest expense decreased by $353,000, or 27.9%, to $912,000 for the three month period ended March 31, 2013 compared to $1.3 million for the three month period ended March 31, 2012. The interest paid on deposits decreased by $271,000, or 25.1%, to $810,000 for the three month period ended March 31, 2013 when compared to the three month period ended March 31, 2012 primarily due to the decrease in the average rate paid and the average balance of deposits. The average balance of deposits for the three month period ended March 31, 2013 was $347.2 million with an average rate of 0.93% compared to the average balance of deposits of $353.2 million and an average rate of 1.22% for the three month period ended March 31, 2012. The decrease in the average rate paid on deposits was due to the continued low interest rate environment in 2013. The decrease in the average balance of deposits was primarily due to a decrease in the average balance of time deposits partially offset by growth in core deposit balances. The interest expense related to advances from the FHLBNY decreased $81,000, or 51.6%, to $76,000 for the three month period ended March 31, 2013 when compared to the three month period ended March 31, 2012. This decrease was due to an $8.4 million decrease in average FHLBNY advance balances and a 67 basis point decline in the

average rate paid on FHLBNY advances to 1.22% when comparing the three month period ended March 31, 2013 with the three month period ended March 31, 2012. The decrease in the average FHLBNY advance balances was a result of the Company’s decision to utilize excess cash obtained from loan prepayments to pay down borrowings. The low interest rate environment caused the average rate paid on borrowings to decrease.

Provision (Credit) for Loan Losses. A provision of $45,000 was recorded to the allowance for loan losses during the three month period ended March 31, 2013, an increase of $80,000, compared to a credit of $35,000 during the three month period ended March 31, 2012. Our credit quality remains strong and non-performing loans have remained steady at $2.5 million and $2.4 million at March 31, 2013 and 2012, respectively. Net charge-offs were $17,000 for the three month period ended March 31, 2013 compared to $6,000 for the three month period ended March 31, 2012.

During the three month period ended March 31, 2013, the Company recorded a $145,000 provision for loan losses on one- to four-family loans and consumer loans that had become classified loans or had been downgraded due to certain factors, such as delinquency or bankruptcy of the borrower. Upon review of the historical losses relating to commercial loans during the three month period ended March 31, 2013, the Company determined that a $37,000 provision for loan losses was necessary due to an increase in average net charge-offs during the three year period ended December 31, 2012. Upon review of the environmental factors relating to commercial real estate loans during the three month period ended March 31, 2013, the Company determined that a $134,000 credit for loan losses was necessary due to a decrease in average commercial real estate loan balances.

During the three month period ended March 31, 2012, the Company recorded a credit of $118,000 in the provision for loan losses due to a decrease in classified commercial loans. The Company also recorded a credit of $117,000 in the provision for loan losses due to a decrease in classified residential mortgage loans, home equity loans and consumer loans during the first quarter of 2012. Upon review of the environmental factors relating to the commercial real estate loans during the first quarter of 2012, the Company determined that a $197,000 provision for loan losses was necessary due to the increase in the commercial loan portfolio and the standard risks presented by the inherent nature of these types of loans.

Refer to Note 4 of the Notes to the Consolidated Financial Statements for details on the provision for loan losses.

Non-interest Income. Non-interest income decreased $6,000, or 1.2%, from $521,000 for the three months ended March 31, 2012 to $515,000 for the three months ended March 31, 2013. The decrease in non-interest income was primarily due to a $26,000 decrease in service charges and fees partially offset by a $19,000 increase on earnings from bank owned life insurance.

Non-interest Expense. Non-interest expense increased by $36,000, or 1.2%, to $3.1 million for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012. Salaries and employee benefits expense increased $25,000, or 1.6%, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012. This was primarily due to annual salary increases and an increase in benefit expenses relating to implementation of a new supplemental executive retirement plan for the President and CEO and certain directors during the fourth quarter of 2012. Occupancy and equipment expense increased $50,000, or 11.3%, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012. Furthermore, postage and supplies increased $14,000, or 23.0%, during the three month period ended March 31, 2013 compared to the same period in the prior year. Both of these increases were primarily due to the costs associated with the opening of our newest branch office in Snyder, New York which occurred during the second quarter of 2013. Professional services expense increased $34,000, or 10.8%, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012, primarily due to higher accounting and consulting expenses to ensure compliance with regulatory and SEC guidance. Advertising expenses decreased $81,000, or 47.1%, for the three month period ended March 31, 2013 compared to the three month period ended March 31, 2012. The decrease was primarily due to additional advertising costs during the three month period ended March 31, 2012 related to production costs associated with a television and print advertising campaign.

Income Tax Expense. Income tax expense decreased by $87,000, or 29.3%, from $297,000 for the three month period ended March 31, 2012 to $210,000 for the three month period ended March 31, 2013. The decrease was primarily due to a decrease in income before income taxes which lowered the effective tax rate of 22.8% for the three month period ended March 31, 2012 to 18.8% for the three month period ended March 31, 2013. The decrease in the effective tax rate was primarily due to a decrease in income as well as a disproportionate projected increase in tax exempt income.

Loans Past Due and Non-performing Assets. We define non-performing loans as loans that are either non-accruing or accruing whose payments are 90 days or more past due. Non-performing assets, including non-performing loans and foreclosed real estate, totaled $3.1 million, or 0.64% of total assets, at March 31, 2013 and $3.0 million, or 0.62% of total assets, at December 31, 2012.

The following table presents information regarding our non‑accrual loans, accruing loans delinquent 90 days or more, and foreclosed real estate as of the dates indicated.


	At March 31,			At December 31,
	2013			2012
	(Dollars in thousands)

Loans past due 90 days or more but still accruing:
Real estate loans:
Residential, one- to four-family	$	108		$	10
Home equity		-			-
Commercial		-			-
Construction		-			-
Other loans:
Commercial loans		-			-
Consumer loans		-			18
Total	$	108		$	28

Loans accounted for on a nonaccrual basis:
Real estate loans:
Residential, one- to four-family	$	1,766		$	1,628
Home equity ⁽¹⁾		206			299
Commercial		255			255
Construction		-			-
Other loans:
Commercial loans		177			201
Consumer loans		17			9
Total non-accrual loans		2,421			2,392
Total nonperforming loans		2,529			2,420
Foreclosed real estate		590			580
Performing restructured loans		-			-
Total nonperforming assets	$	3,119		$	3,000

Ratios:
Nonperforming loans as a percent of net loans:		0.93	%		0.89	%
Nonperforming assets as a percent of total assets:		0.64	%		0.62	%

⁽¹⁾	As of December 31, 2012, one home equity loan for $31,000 and accounted for on a non-accrual basis was restructured and classified as a troubled debt restructuring, due to the borrower’s financial difficulties.

The following table sets forth activity in our allowance for loan losses and other ratios at or for the dates indicated.


	At or for the Three Months Ended
	March 31,
	2013		2012
	(Dollars in thousands)
Balance at beginning of period:	$	1,806	$	1,366
Provision (credit) for loan losses		45		(35)
Charge-offs:
Real estate loans:
Residential, one- to four-family		-		(6)
Home equity		-		-
Commercial		-		-
Construction		-		-
Other loans:
Commercial		(20)		(1)
Consumer		(4)		-
Total charge-offs		(24)		(7)
Recoveries:
Real estate loans:
Residential, one- to four-family		-		1
Home equity		-		-
Commercial		5		-
Construction		-		-
Other loans:
Commercial		2		-
Consumer		-		-
Total recoveries		7		1

Net charge-offs		(17)		(6)

Balance at end of period	$	1,834	$	1,325

Average loans outstanding	$	272,079	$	271,705
Allowance for loan losses as a percent of total net loans		0.67%		0.49%
Allowance for loan losses as a percent of non-performing loans		72.52%		55.51%
Ratio of net charge-offs to average loans outstanding⁽¹⁾		0.02%		0.01%

⁽¹⁾ Annualized

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 meet the lending and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds consist of deposits, scheduled amortization and prepayments of loans and mortgage-backed and asset-backed securities, maturities and sales of other investments, interest earning deposits at other financial institutions and funds provided from operations. We have a written agreement with the Federal Home Loan Bank of New York, which allows us to borrow up to $121.8 million as of March 31, 2013, and is collateralized by a pledge of our mortgage loans. At March 31, 2013, we had outstanding advances under this agreement of $23.9 million. We have a written agreement with the Federal Reserve Bank discount window for overnight borrowings which is collateralized by a pledge of our securities, and allows us to borrow up to the value of the securities pledged, which was equal to a book value of $10.0 million and a fair value of $11.0 million as of March 31, 2013. There were no balances outstanding with the Federal Reserve Bank at March 31, 2013. We have also established a line of credit with M&T Bank for $7.0 million, of which $5.0 million is unsecured and the remaining $2.0 million is required to be secured by a pledge of our securities when a draw is made. There were no borrowings on this line as of March 31, 2013.

Historically, loan repayments and maturing investment securities were a relatively predictable source of funds. However, in light of the current economic environment, there are now more risks related to loan repayments and the valuation and maturity of investment securities. In addition, deposit flows, 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 and the current economic environment reduce the predictability of the timing of these sources of funds.

Our primary investing activities include the origination of loans and the purchase of investment securities. For the three months ended March 31, 2013, we originated loans of approximately $9.8 million in comparison to approximately $9.9 million of loans originated during the three months ended March 31, 2012. Purchases of investment securities totaled $10.7 million in the three months ended March 31, 2013 and $12.3 million in the three months ended March 31, 2012.

At March 31, 2013, we had loan commitments to borrowers of approximately $5.4 million and overdraft lines of protection and unused home equity lines of credit of approximately $26.0 million. Total deposits were $384.3 million at March 31, 2013, as compared to $388.0 million at March 31, 2012. Time deposit accounts scheduled to mature within one year were $75.7 million at March 31, 2013. 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.

In recent years, macro-economic conditions negatively impacted liquidity and credit quality across the financial markets as the U.S. economy experienced an economic downturn. Although recent reports have indicated improvements in the macro-economic conditions, the economic downturn has had far-reaching effects. However, our financial condition, credit quality and liquidity position remain strong.

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 Federal Home Loan Bank, 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 Federal Home Loan Bank in the future.

We do not anticipate any material capital expenditures during the remainder of 2013. We do not have any balloon or other payments due on any long-term obligations or any off-balance sheet items other than loan commitments as described in Note 6 in the Notes to our Consolidated Financial Statements and the borrowing agreements noted above.

Off-Balance Sheet Arrangements

Other than loan commitments, 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 6 in the Notes to our Consolidated Financial Statements for a summary of commitments outstanding as of March 31, 2013.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable as the Company is a smaller reporting company.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II

Item 1A. Risk Factors.

There have been no material changes in the Company’s risk factors from those disclosed in its Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table reports information regarding repurchases by Lake Shore Bancorp of its common stock in each month of the quarter ended March 31, 2013:

COMPANY PURCHASES OF EQUITY SECURITIES



Period	Total Number of Shares Purchased		Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs⁽¹⁾

January 1 through January 31, 2013	-	$	-	-	71,510
February 1 through February 28, 2013	-		-	-	71,510
March 1 through March 31, 2013	-		-	-	71,510
Total	-	$	-	-	71,510

______________

⁽¹⁾ On November 17, 2010, our Board of Directors approved a new stock repurchase plan pursuant to which we can repurchase up to 116,510 shares of our outstanding common stock. This amount represented 5% of our outstanding stock not owned by the MHC as of November 23, 2010. The repurchase plan does not have an expiration date and superseded all of the prior stock repurchase programs.

Item 6. Exhibits



			31.1				Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
			31.2				Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002*
			32.1				Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
			32.2				Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
			101.INS				XBRL Instance Document¹
			101.SCH				XBRL Taxonomy Extension Schema Document¹
			101.CAL				XBRL Taxonomy Calculation Linkbase Document¹
			101.DEF				XBRL Taxonomy Extension Definition Linkbase Document¹
			101.LAB				XBRL Taxonomy Label Linkbase Document¹
			101.PRE				XBRL Taxonomy Presentation Linkbase Document¹

_________________

* Filed herewith.

¹ As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		LAKE SHORE BANCORP, INC.
		(Registrant)

May 15, 2013	By:	/s/ Daniel P. Reininga
		Daniel P. Reininga
		President and Chief Executive Officer
		(Principal Executive Officer)

May 15, 2013	By:	/s/ Rachel A. Foley
		Rachel A. Foley
		Chief Financial Officer
		(Principal Financial and Accounting Officer)



United States		20-4729288
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

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

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


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


		TABLE OF CONTENTS

ITEM		PART I	PAGE

1	FINANCIAL STATEMENTS
	-	Consolidated Statements of Financial Condition as of March 31, 2013 and December 31, 2012 (Unaudited)	1
	-	Consolidated Statements of Income for the Three Months ended March 31, 2013 and 2012 (Unaudited)	2
	-	Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2013 and 2012 (Unaudited)	3
	-	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, 2013 and 2012 (Unaudited)	4
	-	Consolidated Statements of Cash Flows for the Three Months ended March 31, 2013 and 2012 (Unaudited)	5
	-	Notes to Unaudited Consolidated Financial Statements	6
2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		26
3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		39
4	CONTROLS AND PROCEDURES		39

		PART II

1A	RISK FACTORS		39
2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		39
6	EXHIBITS		40
SIGNATURES			41