As filed with the Securities and Exchange Commission on March 14, 2025

Registration No.   

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT UNDER THE

SECURITIES ACT OF 1933

 

 

Lake Shore Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland		6035		Pending
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

31 East Fourth Street

Dunkirk, New York 14048

(716) 366-4070

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Kim C. Liddell

President and Chief Executive Officer

31 East Fourth Street

Dunkirk, New York 14048

(716) 366-4070

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Benjamin M. Azoff, Esq. Luse Gorman, PC 5335 Wisconsin Avenue, N.W., Suite 780 Washington, D.C. 20015 (202) 274-2000		Edward Olifer, Esq. Kilpatrick Townsend & Stockton LLP 701 Pennsylvania Avenue, N.W., Suite 200 Washington, DC 20004 (202) 508-5800

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: ☒

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ☐

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

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☒		Smaller reporting company		☒
Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ☐

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

PROSPECTUS

 

(Proposed Holding Company for Lake Shore Bank)

Up to 5,750,000 Shares of Common Stock

(Subject to Increase to up to 6,612,500 Shares)

 

 

Lake Shore Bancorp, Inc., a Maryland corporation that we refer to as “Lake Shore Bancorp” throughout this prospectus, is offering shares of common stock for sale, on a best efforts basis, in connection with the conversion of Lake Shore, MHC from the mutual holding company to the stock holding company form of organization. The shares being offered for sale represent the ownership interest of Lake Shore, MHC in Lake Shore Bancorp, Inc., a federal corporation which we refer to in this prospectus as “Lake Shore Federal Bancorp.” Lake Shore Federal Bancorp’s common stock is listed on the Nasdaq Global Market under the symbol “LSBK,” and we expect Lake Shore Bancorp’s common stock will be listed on the Nasdaq Global Market under the symbol “LSBK.”

The shares of common stock are first being offered for sale in a subscription offering to eligible depositors of Lake Shore Savings Bank as of specified eligibility dates and to tax-qualified employee benefit plans of Lake Shore Savings Bank. Shares not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given first to residents of the communities served by Lake Shore Savings Bank and then to stockholders of Lake Shore Federal Bancorp. Any shares of common stock not purchased in the subscription offering or in any community offering may be offered for sale to the public through a syndicate of broker-dealers, referred to in this prospectus as the syndicated community offering. The syndicated community offering may begin before the subscription offering and any community offering (including any extensions) have expired. However, no shares purchased in the subscription offering or in any community offering will be issued until the completion of any syndicated community offering. We may sell up to 6,612,500 shares of common stock because of demand for the shares of common stock or changes in market conditions, without resoliciting subscribers. We must sell a minimum of 4,250,000 shares to complete the conversion and stock offering.

In addition to the shares being offered for sale in the stock offering, the shares of common stock of Lake Shore Federal Bancorp currently owned by the public will be exchanged for shares of common stock of Lake Shore Bancorp based on an exchange ratio that will result in existing public stockholders of Lake Shore Federal Bancorp owning approximately the same percentage of common stock of Lake Shore Bancorp as they owned in the common stock of Lake Shore Federal Bancorp immediately before the completion of the conversion and stock offering. We expect to issue up to 3,797,635 shares in the exchange.

The minimum purchase order is 25 shares. Generally, no individual, or individuals acting through a single qualifying account held jointly, may purchase more than 150,000 shares ($1,500,000) of common stock, and no person or entity, together with associates or persons acting in concert with such person or entity, may purchase more than 150,000 shares ($1,500,000) of common stock in all categories of the stock offering combined.

The subscription offering will expire at 2:00 p.m., Eastern time, on [expiration date]. We expect that the community offering, if held, will expire at the same time. We may extend the expiration date of the subscription offering and any community offering without notice to you until [extension date], or longer if the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) approves a later date. No single extension may exceed 90 days and the stock offering must be completed by [final extension date]. Once submitted, orders are irrevocable unless the subscription offering and any community offering are terminated or extended, with regulatory approval, beyond [extension date], or the number of shares of common stock to be sold is increased to more than 6,612,500 shares or decreased to less than 4,250,000 shares. If the subscription offering and any community offering are extended past [extension date], all subscribers will be notified and given the opportunity to confirm, change or cancel their orders. If you do not respond to the notice of extension, we will promptly return your funds with interest or cancel your deposit account withdrawal authorization. If the number of shares to be sold in the stock offering is increased to more than 6,612,500 shares or decreased to less than 4,250,000 shares, we will resolicit subscribers, and all funds delivered to us to purchase shares of common stock in the subscription offering and in any community offering will be returned promptly with interest. Funds received in the subscription offering and in any community offering will be held in a segregated account at Lake Shore Savings Bank and will earn interest at [interest rate]% per annum until completion or termination of the stock offering.

Raymond James & Associates, Inc. is assisting us in selling the shares of common stock, on a best efforts basis, in the subscription offering and in any community offering, and will serve as sole manager for any syndicated community offering. Raymond James & Associates, Inc. is not required to purchase any shares of common stock that are being offered for sale in the stock offering.

OFFERING SUMMARY

Price: $10.00 per Share

 

		Minimum				Midpoint				Maximum				Adjusted Maximum
Number of shares			4,250,000				5,000,000				5,750,000				6,612,500
Gross offering proceeds		$	42,500,000			$	50,000,000			$	57,500,000			$	66,125,000
Estimated offering expenses, excluding selling agent fees and expenses		$	1,502,870			$	1,502,870			$	1,502,870			$	1,502,870
Selling agent fees and expenses (1)(2)		$	627,480			$	720,630			$	813,780			$	920,903
Estimated net proceeds		$	40,369,650			$	47,776,500			$	55,183,350			$	63,701,227
Estimated net proceeds per share		$	9.50			$	9.56			$	9.60			$	9.63

 

(1)

See “The Conversion and Stock Offering—Plan of Distribution; Selling Agent Compensation” for a discussion of Raymond James & Associates, Inc.’s compensation for the stock offering and the compensation to be received by Raymond James & Associates, Inc. and the other broker-dealers that may participate in any syndicated community offering.

(2)	Excludes records agent fees and expenses payable to Raymond James & Associates, Inc., which are included in estimated offering expenses. See “The Conversion and Stock Offering—Records Management.”

 

 

This investment involves a degree of risk, including the possible loss of principal. See “Risk Factors” beginning on page 16.

These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or by any other governmental agency. None of the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the New York State Department of Financial Services, the Federal Deposit Insurance Corporation, or any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

 

 

For assistance, contact the Stock Information Center at [stock center #].

The date of this prospectus is [Prospectus Date].

TABLE OF CONTENTS

 

 

		Page
SUMMARY			1
RISK FACTORS			16
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA			32
FORWARD-LOOKING STATEMENTS			34
HOW WE INTEND TO USE THE PROCEEDS FROM THE STOCK OFFERING			36
OUR DIVIDEND POLICY			37
MARKET FOR THE COMMON STOCK			38
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE			39
CAPITALIZATION			40
PRO FORMA DATA			42
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			46
BUSINESS OF LAKE SHORE BANCORP, INC. AND LAKE SHORE FEDERAL BANCORP			59
BUSINESS OF LAKE SHORE SAVINGS BANK			59
SUPERVISION AND REGULATION			78
TAXATION			89
MANAGEMENT			91
BENEFICIAL OWNERSHIP OF COMMON STOCK			104
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS			105
THE CONVERSION AND STOCK OFFERING			106
COMPARISON OF STOCKHOLDERS’ RIGHTS FOR STOCKHOLDERS OF LAKE SHORE FEDERAL BANCORP			130
RESTRICTIONS ON ACQUISITION OF LAKE SHORE BANCORP, INC.			137
DESCRIPTION OF CAPITAL STOCK OF LAKE SHORE BANCORP, INC.			140
TRANSFER AGENT			142
EXPERTS			142
CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			142
LEGAL MATTERS			143
WHERE YOU CAN FIND ADDITIONAL INFORMATION			143
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF LAKE SHORE BANCORP, INC.			F-1

 

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SUMMARY

The following summary explains the significant aspects of the conversion and the stock offering, as well as the exchange of existing shares of Lake Shore Federal Bancorp common stock for shares of Lake Shore Bancorp common stock. It may not contain all of the information that is important to you. Before making an investment decision, you should read this entire document carefully, including the consolidated financial statements and related notes and the section entitled “Risk Factors.”

Our Organizational Structure and the Proposed Conversion and Stock Offering

Since 2006, when Lake Shore Savings Bank reorganized into the mutual holding company structure, we have operated in a two-tier mutual holding company structure. Lake Shore Federal Bancorp, a federally-chartered corporation, is the publicly-traded stock holding company and the parent company of Lake Shore Savings Bank. At December 31, 2024, Lake Shore Federal Bancorp had consolidated assets of $685.5 million, total deposits of $573.0 million and stockholders’ equity of $89.9 million. Lake Shore Federal Bancorp’s parent company is Lake Shore, MHC, a federally-chartered mutual holding company. At December 31, 2024, Lake Shore Federal Bancorp had 5,735,226 shares of common stock outstanding, of which 3,636,875 shares, or 63.4%, were owned by Lake Shore, MHC, and the remaining 2,098,351 shares were owned by the public.

Pursuant to the terms of the plan of conversion and reorganization, which we refer to as the plan of conversion throughout this prospectus, we are converting from the mutual holding company corporate structure to the fully public stock holding company corporate structure. Upon completion of the conversion and stock offering, Lake Shore, MHC and Lake Shore Federal Bancorp will cease to exist and Lake Shore Bancorp, a Maryland corporation, will become the successor holding company to Lake Shore Federal Bancorp and will become the stock holding company of Lake Shore Bank. The conversion will be accomplished by the merger of Lake Shore, MHC with and into Lake Shore Federal Bancorp, followed by the merger of Lake Shore Federal Bancorp with and into Lake Shore Bancorp. Simultaneously with the merger of Lake Shore Federal Bancorp with and into Lake Shore Bancorp, Lake Shore Savings Bank will convert from a federal savings bank into a New York-chartered commercial bank that will be renamed Lake Shore Bank. The shares of Lake Shore Bancorp common stock being offered for sale represent the majority ownership interest in Lake Shore Federal Bancorp currently owned by Lake Shore, MHC. Public stockholders of Lake Shore Federal Bancorp will receive shares of common stock of Lake Shore Bancorp in exchange for their shares of Lake Shore Federal Bancorp at an exchange ratio intended to preserve the same aggregate ownership interest in Lake Shore Bancorp as they had in Lake Shore Federal Bancorp, adjusted downward to reflect certain assets held by Lake Shore, MHC, without giving effect to new shares purchased in the stock offering or cash paid in lieu of any fractional shares. The shares of Lake Shore Federal Bancorp common stock owned by Lake Shore, MHC will be canceled.

The following diagram shows our current organizational structure, reflecting ownership percentages at December 31, 2024:

 

After the conversion and stock offering are completed, we will be organized as a fully public stock holding company, as follows:

 

Under our current mutual holding company structure, depositors of Lake Shore Savings Bank are members of, and have voting rights in, Lake Shore, MHC, as to all matters requiring a vote of members. Upon completion of the conversion and stock offering, depositors will no longer have voting rights. See “The Conversion and Stock Offering—Effects of the Conversion and Stock Offering—Effect on Voting Rights of Depositors” for further information.

Our Business

Our core business activities are conducted through Lake Shore Savings Bank. Founded in 1891, Lake Shore Savings Bank is headquartered in Dunkirk, New York with ten offices in Erie and Chautauqua Counties in Western New York. Our principal business consists of attracting retail deposits from the general public in the areas surrounding our branch offices and investing those deposits, together with funds generated from operations, primarily in commercial real estate loans, one- to four-family residential mortgage loans, home equity lines of credit and, to a lesser extent, commercial business loans, consumer loans, and investment securities. Our revenues are principally derived from interest earned on our loans and investment securities. Our primary sources of funds for lending and investments are deposits, borrowings, receipts of principal and interest payments on loans and securities, proceeds from sales of loans or securities, maturities and calls of investment securities and income resulting from operations in prior periods.

In April 2023, Kim C. Liddell was appointed President and Chief Executive Officer of Lake Shore Savings Bank and its holding companies, Lake Shore Federal Bancorp and Lake Shore, MHC, in order to lead a new management team to both expeditiously resolve the Consent Order which Lake Shore Savings Bank entered into with the Office of the Comptroller of the Currency (the “OCC”) in February 2023, as well as position the bank for future market opportunities. The Consent Order required Lake Shore Savings Bank to correct certain deficiencies relating to information technology, security, automated clearing house program, audit, management and BSA/AML. In addition, Lake Shore Federal Bancorp and Lake Shore, MHC entered into a written agreement with the Federal Reserve Bank of Philadelphia in June 2023 to support the remediation activities at Lake Shore Savings Bank. As a result of the new management team’s efforts, the Consent Order was terminated by the OCC on December 3, 2024 followed by the termination of the written agreement with the Federal Reserve Bank of Philadelphia on March 4, 2025. With the resolution of the Consent Order and the written agreement, management can focus on its core strategy of positioning the bank as a leading community bank, locally headquartered in Western New York, with more than 133 years of service to our community. We strive to accomplish our goals by continuing to emphasize our exceptional individualized customer service and financial strength, continued community involvement, strong capital levels, multi-channel banking services and penetration in our market areas via organic growth of loans and deposits.

 

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Lake Shore Savings Bank is subject to comprehensive regulation and examination by the OCC. As part of the conversion, Lake Shore Savings Bank will convert its charter to a New York commercial bank and will be renamed Lake Shore Bank. It will then become subject to comprehensive regulation and examination by the New York State Department of Financial Services (“NYSDFS”) and the Federal Deposit Insurance Corporation (the “FDIC”). We sometimes refer to Lake Shore Savings Bank following the charter conversion as Lake Shore Bank.

Lake Shore Bancorp is a newly formed Maryland corporation. Following the completion of the conversion and stock offering, Lake Shore Bancorp will succeed Lake Shore Federal Bancorp as the publicly traded holding company of Lake Shore Savings Bank. Our executive offices are located at 31 East Fourth Street, Dunkirk, New York 14048 and our telephone number is (716) 366-4070. Our website address is www.lakeshoresavings.com. Information on this website is not and should not be considered a part of this prospectus.

Business Strategy

Provide high-quality, personalized service as a leading community bank to our local and loyal customers. We currently operate ten full-service branch offices throughout Western New York, where our branch teams initiate and develop both consumer and commercial customer relationships in and around the surrounding market areas. We offer concierge banking services, together with our online and mobile customer conveniences, creating an individualized approach for customers to manage their finances whenever, wherever and however they wish. As a true local bank, we pride ourselves on offering competitive products delivered with the individualized service our customers have come to expect. Our experienced team of commercial bankers can meet the needs of businesses through a variety of checking and credit products, and banking services. The retail banking team located in our branch offices focuses on meeting the deposit and lending needs of consumer customers throughout various life stages as well as small business customers. From local decision-making, responding quickly and efficiently to customer needs, and utilizing technology to level the playing field with our competitors, we are committed to developing long-term relationships with our customers. Staying true to our local roots and mission of “Putting People First” continues to uniquely position us as a bank of choice in Western New York.

Grow our loan portfolio with an emphasis on commercial lending while maintaining our historical residential mortgage program. We have been strategically focused on increasing the originations of commercial real estate loans to finance the purchase of real property, which generally consists of developed real estate, particularly due to the interest rate risk inherent in holding long-term, fixed rate, residential, one- to four-family real estate loans in our portfolio. We have also focused on commercial business lending to small businesses, including business installment loans, lines of credit and other commercial loans. These types of commercial loans are generally made at higher interest rates and for shorter terms than one- to four-family real estate loans, which mitigates interest rate risk. At December 31, 2024 and 2023, our commercial real estate loan portfolio (including loans to finance the construction of commercial real estate) represented the largest holdings in our loan portfolio at 58.7% and 56.8%, respectively, of total gross loans. At December 31, 2024, our commercial real estate portfolio as a percentage of Lake Shore Savings Bank’s total capital as defined under the federal interagency guidance was 239%. The additional capital raised in the offering and termination of the Consent Order will allow us to further increase our commercial lending capacity by enabling us to originate more loans and expand our relationships with our current commercial customers and assist us to continue to attract new customers. In addition, following the offering, we would consider establishing loan production offices to grow lending teams in our core markets or evaluating opportunities in new markets depending on the acquisition of specific lenders with strong ties to their local communities.

At December 31, 2024 and 2023, residential one- to four-family mortgage loans (including loans to finance the construction of one- to four-family homes) represented the second largest holding in our loan portfolio at 29.5% and 30.8%, respectively, of total gross loans. Residential mortgage lending has historically been a significant part of our business, and we recognize that continuing to originate residential one- to four-family mortgage loans is essential to our status as a community-oriented bank. We may sell long-term conforming fixed rate one- to four-family residential loans that we originate on the secondary market, as part of our interest rate and liquidity 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. We did not sell any one- to four- family residential loans in the secondary market during the years ended December 31, 2024 or 2023.

 

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Manage credit risk to maintain a low level of non-performing assets. We remain committed to maintaining prudent underwriting standards and aggressively monitoring our loan portfolio to maintain asset quality. We have established an experienced commercial credit and lending team and we have implemented well-defined policies, a thorough and efficient loan underwriting process, and active credit monitoring. Furthermore, management and our board of directors review robust loan portfolio analytics on a monthly basis to identify trends that could represent heightened credit risk for the organization. As a result of our continued focus on credit risk management, we had non-performing assets of $3.8 million, or 0.55% of total assets, at December 31, 2024. Our goal is to continue to improve our asset quality through prudent underwriting standards and the diligence of our loan collection personnel.

Increase our share of lower-cost core deposit growth. As a community-based bank, we are focused on growing core deposits within our local communities. As interest rates increased in recent years, customers migrated to higher cost certificates of deposit also referred to as time deposits and we have made a concerted effort in recent periods to begin to reduce our reliance on higher cost certificates of deposit in favor of obtaining lower cost retail and commercial deposit accounts. We also continue to enhance our technology-based deposit products such as remote deposit capture, commercial cash management and mobile deposits in order to accommodate business customers. Our core deposits (which is defined as our deposits other than certificates of deposit with a balance greater than $250,000 and brokered certificates of deposit), represented 94.1% of total deposits at December 31, 2024. Following our conversion to a New York-chartered commercial bank, we will be able to attract and accept municipal deposits which we believe can further enhance core deposits. We intend to continue our focus on core deposit growth by offering our retail and commercial customers a full selection of deposit-related services, and making further investments in technology so that we can enhance our value proposition and deliver high-quality, innovative products and services to our customers.

Pursue opportunistic mergers and acquisitions. In addition to organic growth, we intend to pursue opportunities to acquire banks that offer opportunities for strong financial returns. We recognize the importance of scale and technological innovation in banking. Our primary focus will be on franchises that have strong core deposit and lending relationships, new product capabilities and contiguous market footprints, while maintaining an acceptable risk profile. In addition, we believe that the accelerated rate of consolidation in the banking industry will continue over the next several years such that the capital we are raising in the offering will enhance our ability to make acquisitions of other financial institutions. However, we currently have no understandings or agreements with respect to acquiring any specific financial institution.

Utilize technology to adapt to evolving customer needs. As the banking industry continues to rapidly evolve in terms of technological conveniences, we remain proactive in our efforts to provide e-banking services that our customers expect. We are committed to making investments in technology to make our organization more efficient and to meet customer needs. To this end, we have enhanced the security, monitoring, and updating of our customer systems via the deployment of a cloud-based computing system, in addition to the supporting hardware and software. During 2025, we continue to leverage the use of our core banking system to efficiently serve our customers and provide them with cutting-edge banking services for their convenience.

Leverage management expertise. We intend to rely on management’s extensive experience to execute our business strategy. Our new management team, led by Mr. Liddell, has a track record of profitably growing financial institutions, creating value and providing liquidity for stockholders. With the enhancements to our management team over the last two years, we have positioned ourselves to capitalize on market opportunities and enhance our profitability.

Attract and retain key talent. Key to our strategy is our ability to attract and retain exceptional talent. As a community-based bank, we are focused on recruiting experienced lenders with knowledge of our markets who have either been displaced or are dissatisfied due to consolidation. We will seek to attract lenders with local relationships that can have a near-term impact on growing our loan portfolio.

 

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Reasons for the Conversion and Stock Offering

Our primary reasons for converting to the fully public stock form of ownership and undertaking the stock offering are to:

 

•

support our planned growth and strengthen our regulatory capital position with the additional capital we will raise in the stock offering;

 

•

improve the liquidity of our shares of common stock;

 

•

transition our organization to a stock holding company structure, which gives us greater flexibility to access the capital markets compared to our existing mutual holding company structure; and

 

•

facilitate future mergers and acquisitions.

For more information, see “The Conversion and Stock Offering—Reasons for the Conversion and Stock Offering.”

Terms of the Stock Offering

We are offering for sale between 4,250,000 and 5,750,000 shares of common stock to eligible depositors of Lake Shore Savings Bank, to our tax-qualified employee benefit plans and, to the extent shares remain available, in a community offering to the general public, with a preference given first to natural persons (including trusts of natural persons) residing in the New York counties of Chautauqua, Erie and Cattaraugus, and then to existing public stockholders of Lake Shore Federal Bancorp as of the close of business on [record date]. If necessary, we will also offer for sale shares to the general public in a syndicated community offering. The number of shares of common stock to be sold may be increased to up to 6,612,500 shares as a result of demand for the shares of common stock in the offering or changes in market conditions. Unless the number of shares of common stock to be offered is increased to more than 6,612,500 shares or decreased to less than 4,250,000 shares, or the subscription and community offerings are extended beyond [extension date], subscribers will not have the opportunity to change or cancel their stock orders once submitted. If the subscription and community offerings are extended beyond [extension date], all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. All subscribers will be notified by mail sent to the address the subscriber provides on the stock order form they have submitted. If you do not respond to the notice of extension, your order will be cancelled and we will promptly return your funds with interest at [interest rate]% per annum or cancel your deposit account withdrawal authorization. If the number of shares to be sold is increased to more than 6,612,500 shares or decreased to less than 4,250,000 shares, all subscribers’ stock orders will be canceled, their withdrawal authorizations will be canceled and funds delivered to us to purchase shares of common stock in the subscription and community offerings will be returned promptly with interest at [interest rate]% per annum. We will then resolicit subscribers, giving them an opportunity to place new orders for a period of time. No shares purchased in the subscription offering and community offering will be issued until the completion of any syndicated community offering.

The purchase price of each share of common stock offered for sale in the stock offering is $10.00. All investors will pay the same purchase price per share, regardless of whether the shares are purchased in the subscription offering, the community offering or a syndicated community offering. Investors will not be charged a commission to purchase shares of common stock in the stock offering. Raymond James & Associates, Inc., which we refer to as “Raymond James” in this prospectus, our marketing agent in the subscription offering, will use its best efforts to assist us in selling shares of our common stock in the subscription offering but is not obligated to purchase any shares of common stock in the subscription offering.

How We Determined the Offering Range, the Exchange Ratio and the $10.00 Per Share Purchase Price

The amount of common stock we are offering for sale and the exchange ratio for the exchange of shares of Lake Shore Federal Bancorp for shares of Lake Shore Bancorp are based on an independent appraisal of the estimated market value of Lake Shore Bancorp, assuming the stock offering has been completed. RP Financial, LC. (“RP Financial”), our independent appraiser, has estimated that, as of February 3, 2025, this market value was $78.7 million. Based on federal regulations, this market value forms the midpoint of a valuation range with a minimum of $66.9 million and a maximum of $90.5 million ($104.1 million at the adjusted maximum). Based on this valuation range, the 63.4% ownership interest of Lake Shore, MHC in Lake Shore Federal Bancorp as of December 31, 2024 being sold in the stock offering, certain assets held by Lake Shore, MHC and the $10.00 per share price, the number of shares of common stock being offered for sale by Lake Shore Bancorp ranges from 4,250,000 shares to 5,750,000 shares. The purchase price of $10.00 per share was selected primarily because it is the price most commonly used in

 

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mutual-to-stock conversions of financial institutions. The exchange ratio ranges from 1.1632 shares of Lake Shore Bancorp common stock for each share of Lake Shore Federal Bancorp common stock at the minimum of the offering range to 1.5738 (1.8098 at the adjusted maximum) shares of Lake Shore Bancorp common stock for each share of Lake Shore Federal Bancorp common stock at the maximum of the offering range, and will generally preserve in Lake Shore Bancorp the percentage ownership of public stockholders in Lake Shore Federal Bancorp immediately before the completion of the conversion and stock offering. RP Financial will update its appraisal before we complete the conversion and stock offering. If, as a result of demand for the shares or changes in market conditions, RP Financial determines that our estimated pro forma market value has increased, we may sell up to 6,612,500 shares without further notice to you. If our pro forma market value at that time is either below $66.9 million or above $104.1 million, then, after consulting with the Federal Reserve Board, we may: terminate the stock offering and promptly return all funds with interest; set a new offering range and give all subscribers the opportunity to place a new order; or take such other actions as may be permitted by the Federal Reserve Board and the Securities and Exchange Commission.

The appraisal is based in part on Lake Shore Federal Bancorp’s financial condition and results of operations, the pro forma effect of the additional capital raised by the sale of shares of common stock in the stock offering, and an analysis of a peer group of 10 publicly traded savings and loan and bank holding companies that RP Financial considers comparable to Lake Shore Federal Bancorp. The appraisal peer group consists of the following companies, all of which are traded on the Nasdaq Stock Market.

 

Company Name		Ticker Symbol				Headquarters				Total Assets
										(In millions)
Affinity Bancshares, Inc.			AFBI				Covington, GA			$	867	(1)
BV Financial, Inc.			BVFL				Baltimore, MD			$	912	(1)
Central Plains Bancshares, Inc.			CPBI				Grand Island, NE			$	482	(2)
ECB Bancorp, Inc.			ECBK				Everett, MA			$	1,358	(2)
Home Federal Bancorp, Inc. of Louisiana			HFBL				Shreveport, LA			$	608	(1)
IF Bancorp, Inc.			IROQ				Watseka, IL			$	885	(1)
Magyar Bancorp, Inc.			MGYR				New Brunswick, NJ			$	1,008	(1)
PB Bancshares, Inc.			PBBK				Coatesville, PA			$	453	(2)
Provident Bancorp, Inc.			PVBC				Amesbury, MA			$	1,593	(1)
Texas Community Bancshares, Inc.			TCBS				Mineola TX			$	446	(2)

 

(1)	As of December 31, 2024

(2)	As of September 30, 2024.

The following table presents a summary of selected pricing ratios for Lake Shore Bancorp (on a pro forma basis) as of and for the twelve months ended December 31, 2024, and for the peer group companies based on earnings and other information as of and for the twelve months ended December 31, 2024, with stock prices as of February 3, 2025, as reflected in the appraisal report. Compared to the average pricing of the peer group, and based upon the information in the following table, our pro forma pricing ratios at the midpoint of the offering range indicated a discount of 29.8% on a price-to-book value basis, a discount of 32.1% on a price-to-tangible book value basis, and a discount of 25.1% on a price-to-earnings basis.

 

		Price-to-earnings multiple (1)				Price-to-book value ratio				Price-to-tangible book value ratio
Lake Shore Bancorp (on a pro forma basis, assuming completion of the conversion and stock offering)
Adjusted Maximum			18.58x				71.38	%			71.38	%
Maximum			16.44x				65.40	%			65.40	%
Midpoint			14.50x				59.70	%			59.70	%
Minimum			12.50x				53.36	%			53.36	%
Valuation of peer group companies, all of which are fully converted (on an historical basis)
Averages			19.37x				85.09	%			87.89	%
Medians			17.27x				82.20	%			85.68	%

 

(1)	Price-to-earnings multiples calculated by RP Financial in the independent appraisal are based on an estimate of “core” or recurring earnings for the twelve months ended December 31, 2024. These ratios are different than those presented in “Pro Forma Data.”

 

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The independent appraisal does not indicate trading market value. Do not assume or expect that our valuation as indicated in the appraisal means that after the conversion and stock offering the shares of our common stock will trade at or above the $10.00 per share purchase price. Furthermore, the pricing ratios presented in the appraisal were used by RP Financial to estimate our pro forma appraised value for regulatory purposes and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion and Stock Offering—Stock Pricing and Number of Shares to be Issued.”

Effect of Lake Shore, MHC’s Assets on Minority Stock Ownership

Public stockholders of Lake Shore Federal Bancorp will receive shares of common stock of Lake Shore Bancorp in exchange for their shares of common stock of Lake Shore Federal Bancorp pursuant to an exchange ratio that is designed to provide public stockholders with the same ownership percentage of the common stock of Lake Shore Bancorp after the conversion as their ownership percentage in Lake Shore Federal Bancorp immediately before the conversion, without giving effect to new shares purchased in the offering, cash paid in lieu of any fractional shares. However, the exchange ratio will be adjusted downward to reflect net assets held by Lake Shore, MHC (other than shares of common stock of Lake Shore Federal Bancorp) at the completion of the conversion and stock offering, which net assets totaled $230,000 at December 31, 2024. This adjustment would decrease Lake Shore Federal Bancorp’s public stockholders’ ownership interest in Lake Shore Bancorp from 36.59% to 36.48%, and would increase the ownership interest of persons who purchase stock in the stock offering from 63.41% (the amount of Lake Shore Federal Bancorp’s outstanding stock held by Lake Shore, MHC) to 63.52%.

The Exchange of Existing Shares of Lake Shore Federal Bancorp Common Stock

If you are a stockholder of Lake Shore Federal Bancorp immediately before the completion of the conversion and stock offering, your shares will be exchanged for shares of common stock of Lake Shore Bancorp. The number of shares of common stock you will receive will be based on the exchange ratio, which will depend upon our final appraised value and the percentage of outstanding shares of Lake Shore Federal Bancorp common stock owned by public stockholders immediately before the completion of the conversion and stock offering. The following table shows how the exchange ratio will adjust, based on the appraised value of Lake Shore Bancorp as of February 3, 2025, assuming public stockholders of Lake Shore Federal Bancorp own 63.4% of the outstanding shares of Lake Shore Federal Bancorp common stock and Lake Shore, MHC had net assets (excluding its shares of Lake Shore Federal Bancorp common stock) of $230,000 immediately before the completion of the conversion and stock offering. The table also shows the number of shares of Lake Shore Bancorp common stock a hypothetical owner of Lake Shore Federal Bancorp common stock would receive in exchange for 100 shares of Lake Shore Federal Bancorp common stock owned at the completion of the conversion and stock offering, depending on the number of shares of common stock issued in the conversion and stock offering.

 

		Shares to be Sold in the Stock Offering								Shares of Lake Shore Bancorp to be Issued in Exchange for Shares of Lake Shore  Federal Bancorp								Total Shares of Common Stock to be Issued in Exchange and Sold in Stock Offering				Exchange Ratio				Equivalent Value of Shares Based Upon Offering Price (1)				Equivalent Pro Forma Tangible Book Value Per Exchanged Share (2)				Whole Shares to be Received for 100 Existing Shares (3)
		Amount				Percent				Amount				Percent
Minimum			4,250,000				63.5	%			2,440,823				36.5	%			6,690,823				1.1632			$	11.63			$	21.80				116
Midpoint			5,000,000				63.5				2,871,557				36.5				7,871,557				1.3685				13.68				22.92				136
Maximum			5,750,000				63.5				3,302,290				36.5				9,052,290				1.5738				15.74				24.06				157
Adjusted Maximum			6,612,500				63.5				3,797,635				36.5				10,410,135				1.8098				18.10				25.36				180

 

(1)	Represents the value of shares of Lake Shore Bancorp common stock to be received in the conversion and stock offering by a holder of one share of Lake Shore Federal Bancorp, pursuant to the exchange ratio, based upon the $10.00 per share offering price.

 

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(2)	Represents the pro forma tangible book value (equity) per share at each level of the offering range multiplied by the respective exchange ratio. At December 31, 2024, Lake Shore Federal Bancorp’s tangible book value per share was $15.67.

(3)	Cash will be paid in lieu of fractional shares.

No fractional shares of Lake Shore Bancorp common stock will be issued to any public stockholder of Lake Shore Federal Bancorp. For each fractional share that otherwise would be issued, Lake Shore Bancorp will pay in cash an amount equal to the product obtained by multiplying the fractional share interest to which the holder otherwise would be entitled by the $10.00 per share offering price.

Intended Use of the Proceeds From the Stock Offering

We intend to invest at least 50% of the net proceeds from the stock offering in Lake Shore Bank, fund a loan to our employee stock ownership plan to finance its purchase of shares of common stock in the stock offering, and contribute and retain the remainder of the net proceeds from the stock offering at Lake Shore Bancorp. Therefore, assuming we sell 5,000,000 shares of common stock in the stock offering at the midpoint of the offering range resulting in net proceeds of $47.8 million, we intend to invest $23.9 million in Lake Shore Bank, loan $4.0 million to our employee stock ownership plan to fund its purchase of shares of common stock and retain the remaining $19.9 million of the net proceeds at Lake Shore Bancorp.

Lake Shore Bancorp may use the funds it retains for investment in securities, to repurchase shares of common stock, to acquire other financial institutions or financial services companies, to pay cash dividends and for other general corporate purposes. Lake Shore Bank may use the proceeds it receives to support increased lending, enhance existing, or support growth and the development of, new products and services, to potentially restructure Lake Shore Bank’s investment securities portfolio or expand its branch network by establishing or acquiring new branches, or establishing loan production offices or by acquiring other financial institutions or financial services companies. We do not currently have any agreements or understandings regarding any acquisition transactions.

See “How We Intend to Use the Proceeds From the Stock Offering” for additional information.

Persons Who May Order Shares of Common Stock in the Stock Offering

We are offering the shares of common stock for sale in a subscription offering in the following descending order of priority:

 

(i)

To depositors with accounts at Lake Shore Savings Bank with aggregate balances of at least $50.00 at the close of business on December 31, 2023.

 

(ii)

To our tax-qualified employee benefit plans (including Lake Shore Savings Bank’s employee stock ownership plan), which may subscribe for, in the aggregate, up to 10% of the shares of common stock sold in the stock offering. We expect our employee stock ownership plan to purchase 8% of the shares of common stock sold in the stock offering.

 

(iii)

To depositors with accounts at Lake Shore Savings Bank with aggregate balances of at least $50.00 at the close of business on [Supp Eligible Date].

 

(iv)

To depositors of Lake Shore Savings Bank at the close of business on [record date].

Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given first to natural persons (including trusts of natural persons) residing in the New York counties of Chautauqua, Erie and Cattaraugus, and then to Lake Shore Federal Bancorp’s public stockholders at the close of business on [record date]. If held, the community offering is expected to begin concurrently with the subscription offering, but may begin concurrently with, during or promptly after the subscription offering. We also may offer for sale shares of common stock not purchased in the subscription offering and the community offering in a syndicated community offering. Raymond James will act as sole manager for the

 

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syndicated community offering. We have the right to accept or reject, in our sole discretion, orders received in the community offering or syndicated community offering, and our interpretation of the terms and conditions of the plan of conversion will be final. Any determination to accept or reject stock orders in the community offering or syndicated community offering will be based on the facts and circumstances available to management at the time of the determination.

If we receive orders for more shares than we are offering for sale, we may not be able to fill your order in whole or in part. A detailed description of the subscription offering, the community offering and the syndicated community offering, as well as a discussion regarding allocation procedures, can be found in the section of this prospectus entitled “The Conversion and Stock Offering.”

Limits on How Much Common Stock You May Purchase

The minimum number of shares of common stock that may be purchased is 25 shares.

Generally, no individual, or individuals acting through a single qualifying account held jointly, may purchase more than 150,000 shares ($1,500,000) of common stock. If any of the following persons purchase shares of common stock, their purchases, in all categories of the stock offering, when combined with your purchases, cannot exceed 150,000 shares ($1,500,000) of common stock:

 

•

your spouse or other blood or marriage relative, who lives in your home or who is a director or who is a director or officer of Lake Shore Federal Bancorp or Lake Shore Savings Bank;

 

•

corporations or other entities in which you are a senior officer or partner or have a 10% or greater beneficial ownership interest;

 

•

trusts or other estates in which you are the trustee or fiduciary or have a substantial beneficial interest in the trust or other estate; or

 

•

other persons who may be your associates or persons acting in concert with you.

Unless we determine otherwise, persons having the same address and persons exercising subscription rights through qualifying accounts registered to the same address will be subject to the overall purchase limitation of 150,000 shares ($1,500,000).

In addition to the above purchase limitations, there is an ownership limitation for current stockholders of Lake Shore Federal Bancorp other than our employee stock ownership plan. Shares of common stock that you purchase in the stock offering individually and together with persons described above, plus any shares you and they receive in exchange for existing shares of Lake Shore Federal Bancorp common stock, may not exceed 9.9% of the total shares of common stock to be issued and outstanding after the completion of the conversion and stock offering. However, if, based on your current ownership level, you will own more than 9.9% of the total shares of common stock of Lake Shore Bancorp to be issued and outstanding after the completion of the conversion and stock offering following the exchange of your shares of Lake Shore Federal Bancorp common stock, you will be ineligible to purchase any new shares in the stock offering. You will be required to obtain regulatory approval or non-objection before acquiring 10% or more of Lake Shore Bancorp’s common stock.

Subject to regulatory approval, we may increase or decrease the purchase and ownership limitations at any time. See the detailed description of the purchase limitations in “The Conversion and Stock Offering—Additional Limitations on Common Stock Purchases.”

How You May Purchase Shares of Common Stock in the Subscription Offering and the Community Offering

In the subscription offering and any community offering, you may pay for your shares only by:

 

(i)

personal check, bank check or money order, from the purchaser, made payable directly to Lake Shore Bancorp;

 

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(ii)

authorizing us to withdraw available funds (without any early withdrawal penalty) from your Lake Shore Savings Bank deposit account(s), other than checking accounts or individual retirement accounts (IRAs); or

 

(iii)

cash.

Cash will only be accepted at Lake Shore Savings Bank’s main office and will be converted to a bank check. Please do not submit cash by mail. Lake Shore Savings Bank, by law, is not permitted to lend funds to anyone to purchase shares of common stock in the stock offering. Additionally, you may not use any type of third party check to pay for shares of common stock. Wire transfers will not be accepted. Applicable regulations prohibit Lake Shore Savings Bank from lending funds or extending credit to any person to purchase shares of common stock in the stock offering. You may not submit a Lake Shore Savings Bank line of credit check for payment. You may not designate withdrawal from Lake Shore Savings Bank’s accounts with check-writing privileges; rather, submit a check. If you request a direct withdrawal, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and will immediately withdraw the amount from your checking account(s). You may not authorize direct withdrawal from a Lake Shore Savings Bank individual retirement account, or IRA. See “—Using Individual Retirement Account Funds to Purchase Shares of Common Stock.”

You may subscribe for shares of common stock in the subscription and community offerings by delivering a signed and completed original stock order form, together with full payment payable to Lake Shore Bancorp or authorization to withdraw funds from one or more of your Lake Shore Savings Bank deposit accounts, provided that the stock order form is received before 2:00 p.m., Eastern time, on [expiration date], which is the expiration of the subscription offering period. You may submit your stock order form and payment by mail using the stock order reply envelope provided or by paying for overnight delivery to the address listed on the stock order form. You may also hand-deliver stock order forms to our main office, located at 31 East Fourth Street, Dunkirk, New York 14048. Hand-delivered stock order forms will be accepted only at this location. We will not accept stock order forms at other offices of Lake Shore Savings Bank. Do not mail stock order forms to any of Lake Shore Savings Bank’s offices.

See “The Conversion and Stock Offering—Procedure for Purchasing Shares in the Subscription and Community Offerings—Payment for Shares” for a complete description of how to purchase shares in the subscription and community offerings.

Using Individual Retirement Account Funds to Purchase Shares of Common Stock

You may be able to subscribe for shares of common stock using funds in your individual retirement account (“IRA”) or other retirement account. If you wish to use some or all of the funds in your Lake Shore Savings Bank IRA or other retirement account, the applicable funds must be transferred to a self-directed account maintained by an independent custodian or trustee, such as a brokerage firm, and the purchase must be made through that account. If you do not have such an account, you will need to establish one before placing your stock order. An annual administrative fee may be payable to the independent custodian or trustee. Because individual circumstances differ and the processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the [expiration date] offering deadline, for assistance with purchases using funds in your IRA or other retirement account you may have at Lake Shore Savings Bank or elsewhere. Whether you may use such funds to purchase shares in the stock offering may depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held.

See “The Conversion and Stock Offering—Procedure for Purchasing Shares in the Subscription and Community Offerings—Payment for Shares” and “—Using Individual Retirement Account Funds” for a complete description of how to use IRA funds to purchase shares of common stock in the stock offering.

 

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Market for Common Stock

Existing publicly held shares of Lake Shore Federal Bancorp’s common stock are listed on the Nasdaq Global Market under the symbol “LSBK.” Upon completion of the conversion and stock offering, the shares of common stock of Lake Shore Bancorp will be issued in exchange for the existing shares of Lake Shore Federal Bancorp. We expect to list the shares of Lake Shore Bancorp common stock on the Nasdaq Global Market under the symbol “LSBK.” Raymond James has advised us that it intends to make a market in our common stock following the stock offering, but is under no obligation to do so.

Our Dividend Policy

In 2024, Lake Shore Federal Bancorp resumed paying a cash dividend of $0.18 per share to its public stockholders. On March 11, 2025, Lake Shore Federal Bancorp suspended the payment of cash dividends pending the completion of the conversion from the mutual holding company to the stock holding company form of organization and related stock offering. Following completion of the stock offering, our board of directors intends to resume paying cash dividends on our shares of common stock, subject to our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. However, no decision has been made with respect to the amount of any dividend payments which will be determined once the board of directors can evaluate the amount of common stock outstanding. We cannot assure you that any such dividends will not be reduced or eliminated in the future.

For information regarding our proposed dividend policy, see “Our Dividend Policy.” For information regarding our recent dividend payment history, see “Selected Consolidated Financial and Other Data” and “Market for the Common Stock.”

Purchases by Directors and Executive Officers

We expect our directors and executive officers, together with their associates, to subscribe for 262,000 shares of common stock in the stock offering, representing 6.2% of the shares to be sold at the minimum of the offering range. The purchase price paid by them will be the same $10.00 per share price paid by all other persons who purchase shares of common stock in the stock offering. Following the conversion and stock offering, our directors and executive officers, together with their associates, are expected to beneficially own 504,674 shares of common stock of Lake Shore Bancorp, or 5.6% of our total outstanding shares of common stock at the minimum of the offering range, which includes shares they currently own in Lake Shore Federal Bancorp that will be exchanged for shares of Lake Shore Bancorp.

See “Subscriptions by Directors and Executive Officers” for more information on the proposed purchases of shares of common stock by our directors and executive officers.

Deadline for Orders of Shares of Common Stock in the Subscription and Community Offerings

The deadline for submitting orders to purchase shares of common stock in the subscription offerings and, if held, in the community offering is 2:00 p.m., Eastern time, on [expiration date], unless we extend this deadline. If you wish to purchase shares of common stock, a properly completed and signed original stock order form, together with full payment, must be received (not postmarked) by this time.

Although we will make reasonable attempts to provide this prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 2:00 p.m., Eastern time, on [expiration date], whether or not we have been able to locate each person entitled to subscription rights.

See “The Conversion and Stock Offering—Procedure for Purchasing Shares in the Subscription and Community Offerings—Expiration Date” for a complete description of the deadline for purchasing shares in the stock offering.

 

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You May Not Sell or Transfer Your Subscription Rights

Applicable regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to certify that you are purchasing the common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights or the shares that you are purchasing. We intend to take legal action, including reporting persons to federal or state agencies, against anyone who we believe has sold or transferred his or her subscription rights. We will not accept your order if we have reason to believe you have sold or transferred your subscription rights. On the stock order form, you cannot add the names of others for joint stock registration who do not have subscription rights or who qualify only in a lower subscription offering priority than you do. Doing so may jeopardize your subscription rights. You may only add those who were eligible to purchase shares of common stock in the subscription offering at your date of eligibility. In addition, the stock order form requires that you list all deposit and loan accounts, giving all names on each account and the account number at the applicable eligibility date. Failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation.

Delivery of Shares of Common Stock

All shares of common stock sold will be issued in book entry form. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock issued in the subscription and community offerings will be mailed by our transfer agent to the persons entitled thereto at the registration address noted by them on their stock order forms as soon as practicable following consummation of the conversion and stock offering. We expect trading in the stock to begin on the day of completion of the conversion and stock offering or the next business day. The conversion and stock offering is expected to be completed as soon as practicable following satisfaction of the conditions described below in “—Conditions to Completion of the Conversion and Stock Offering.” Until a statement reflecting your ownership of shares of common stock is available and delivered to you, you may not be able to sell the shares of common stock that you purchased in the stock offering, even though the common stock will have begun trading. Your ability to sell your shares of common stock before receiving your statement will depend on arrangements you may make with a brokerage firm.

Conditions to Completion of the Conversion and Stock Offering

We cannot complete the conversion and stock offering unless:

 

•

The plan of conversion is approved by at least a majority of votes eligible to be cast by members of Lake Shore, MHC (i.e., depositors and certain borrowers of Lake Shore Savings Bank) as of the close of business on [record date];

 

•

The plan of conversion is approved by Lake Shore Federal Bancorp stockholders holding at least two-thirds of the outstanding shares of common stock of Lake Shore Federal Bancorp as of the close of business on [record date], including the shares owned by Lake Shore, MHC;

 

•

The plan of conversion is approved by Lake Shore Federal Bancorp stockholders holding at least a majority of the outstanding shares of common stock of Lake Shore Federal Bancorp as of the close of business on [record date], excluding the shares owned by Lake Shore, MHC;

 

•

We sell at least the minimum number of shares of common stock offered in the stock offering;

 

•

We receive approval from the Federal Reserve Board; and

 

•

The NYSDFS and the FDIC approve the charter conversion of Lake Shore Savings Bank from a federally chartered savings bank to a New York commercial bank.

Lake Shore, MHC intends to vote its shares in favor of the plan of conversion. At the close of business on [record date], Lake Shore, MHC owned 3,636,875 shares, or approximately 63.4%, of the outstanding shares of common stock of Lake Shore Federal Bancorp. At the close of business on [record date], the directors and executive

 

12

officers of Lake Shore Federal Bancorp and their affiliates owned _____ shares of Lake Shore Federal Bancorp common stock (excluding exercisable options), or ___% of the outstanding shares of common stock and ___% of the outstanding shares of common stock excluding the shares owned by Lake Shore, MHC. They intend to vote those shares in favor of the plan of conversion.

Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares

If we do not receive orders for at least 4,250,000 shares of common stock, we may take one or more steps to sell the minimum number of shares of common stock in the offering range. Specifically, we may:

 

(i)

increase the purchase and ownership limitations; and/or

 

(ii)

seek regulatory approval to extend the stock offering beyond [extension date], so long as we resolicit subscribers who previously submitted subscriptions in the stock offering; and/or

 

(iii)

increase the shares purchased by the employee stock ownership plan.

If we extend the stock offering past [extension date], all subscribers will be notified and given an opportunity to confirm, change or cancel their orders. If you do not respond to the notice of extension, we will cancel your stock order and promptly return your funds with interest for funds received in the subscription offering and, if held, the community offering or cancel your deposit account withdrawal authorization. If one or more purchase limitations are increased, subscribers in the subscription offering who ordered the maximum amount and who indicated a desire to be resolicited on the stock order form will be, and, in our sole discretion, some other large subscribers may be, given the opportunity to increase their subscriptions up to the then-applicable limit.

Possible Change in the Offering Range

RP Financial will update its appraisal before we complete the conversion and stock offering. If, as a result of demand for the shares or changes in market conditions, RP Financial determines that our pro forma market value has increased, we may sell up to 6,612,500 shares in the offering without further notice to you. If our pro forma market value at that time is either below $66.9 million or above $104.1 million (the minimum and adjusted maximum pro forma market value, respectively, based on the appraised value of Lake Shore Bancorp as of February 3, 2025), then, after consulting with the Federal Reserve Board, we may:

 

•

terminate the stock offering and promptly return all funds (with interest paid on funds received in the subscription offering and any community offering);

 

•

set a new offering range; or

 

•

take such other actions as may be permitted by the Federal Reserve Board and the Securities and Exchange Commission.

If we set a new offering range, we will promptly return funds, with interest at [interest rate]% per annum, for funds received for purchases in the subscription offering and any community offering, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. We will then resolicit subscribers, allowing them to place a new stock order for a period of time.

Possible Termination of the Stock Offering

We may terminate the stock offering at any time before the special meeting of members of Lake Shore, MHC and the special meeting of stockholders of Lake Shore Federal Bancorp that have been called to vote on the conversion and stock offering, and at any time after these approvals with regulatory approval. If we terminate the stock offering, we will promptly return your funds with interest at [interest rate]% per annum, and we will cancel deposit account withdrawal authorizations.

 

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Benefits to Management and Potential Dilution to Stockholders Resulting from the Conversion and Stock Offering

We expect our employee stock ownership plan, which is a tax-qualified retirement plan for the benefit of Lake Shore Savings Bank’s employees, to purchase up to 8% of the shares of common stock we sell in the stock offering. If market conditions warrant, in the judgment of its trustees, the employee stock ownership plan’s subscription order will not be filled and the employee stock ownership plan may elect to purchase shares in the open market following the completion of the conversion and stock offering, subject to the approval of the Federal Reserve Board.

We intend to implement one or more new stock-based benefit plans no earlier than six months after completion of the conversion and stock offering. Stockholder approval of these plans would be required. We have not determined whether we would adopt the plans within or after 12 months following the completion of the conversion and stock offering. If we implement stock-based benefit plans within 12 months following the completion of the conversion and stock offering, the stock-based benefit plans would be limited to reserving a number of shares (i) up to 4% of the shares of common stock sold in the stock offering for awards of restricted stock to key employees and directors, at no cost to the recipients, and (ii) up to 10% of the shares of common stock sold in the stock offering for issuance pursuant to the exercise of stock options by key employees and directors. If the stock-based benefit plan is adopted more than 12 months after the completion of the conversion and stock offering, it would not be subject to the percentage limitations set forth above. We have not yet determined the definitive number of shares that would be reserved for issuance under these plans. For a description of our current stock-based benefit plan, see “Management—Benefits to be Considered Following Completion of the Conversion and Stock Offering.”

The following table summarizes the number of shares of common stock and the aggregate dollar value of grants that are available under one or more stock-based benefit plans if such plans reserve a number of shares of common stock equal to 4% and 10% of the shares sold in the stock offering for restricted stock awards and stock options, respectively. The table shows the dilution to stockholders if all such shares are issued from authorized but unissued shares, instead of shares purchased in the open market. A portion of the stock grants shown in the table below may be made to non-management employees. The table also sets forth the number of shares of common stock to be acquired by the employee stock ownership plan for allocation to all qualifying employees.

 

		Number of Shares to be Granted or Purchased												Dilution Resulting From Issuance of Shares for Stock-Based Benefit Plans				Value of Grants (1)
		At Minimum of Offering Range				At Adjusted Maximum of Offering Range				As a Percentage of Common Stock to be Sold in the Stock Offering
																		At Minimum of Offering Range				At Adjusted Maximum of Offering Range
Employee stock ownership plan			340,000				529,000				8.0	%			N/A	(2)		$	3,400			$	5,290
Restricted stock awards			170,000				264,500				4.0				2.48	%			1,700				2,645
Stock options			425,000				661,250				10.0				5.97	%			2,261				3,518
Total			935,000				1,454,750				22.0	%			8.17	%		$	7,361			$	11,453

 

(1)

The actual value of restricted stock awards will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value for restricted stock awards is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $5.32 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; an expected option term of 10 years; no dividend yield; a risk-free rate of return of 4.58%; and expected volatility of 32.51%. The actual value of stock options granted will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted.

(2)	No dilution is reflected for the employee stock ownership plan because such shares are assumed to be purchased in the stock offering.

We may fund our stock-based benefit plans through open market purchases, as opposed to new issuances of stock; however, if any options previously granted under our existing 2006 Stock Option Plan, 2012 Equity Incentive Plan or 2025 Equity Incentive Plan are exercised during the first year following completion of the stock offering, they will be funded with newly issued shares as federal regulations do not permit us to repurchase our shares during the first year following the completion of the stock offering except to fund the grants of restricted stock under a stock-based benefit plan or under extraordinary circumstances.

 

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Income Tax Consequences

Lake Shore, MHC, Lake Shore Federal Bancorp, Lake Shore Savings Bank, and Lake Shore Bancorp have received an opinion of counsel, Luse Gorman, PC, regarding the material federal income tax consequences of the conversion and stock offering, and have received an opinion of Yount, Hyde & Barbour, P.C. regarding the material New York tax consequences of the conversion and stock offering. As a general matter, the conversion and stock offering will not be a taxable transaction for purposes of federal or state income taxes to Lake Shore, MHC, Lake Shore Federal Bancorp, Lake Shore Savings Bank, and Lake Shore Bancorp, persons eligible to subscribe in the subscription offering, or existing stockholders of Lake Shore Federal Bancorp (except as to cash paid for fractional shares). Existing stockholders of Lake Shore Federal Bancorp who receive cash in lieu of fractional shares of Lake Shore Bancorp will recognize a gain or loss equal to the difference between the cash received and the tax basis of the fractional share.

Risk Factors

An investment in Lake Shore Bancorp common stock is subject to risk, including risks related to our business and this offering. Before making an investment decision, you should read this entire document carefully, including the section entitled “Risk Factors” that immediately follows and that discusses the above risks in further detail.

How You Can Obtain Additional Information—Stock Information Center

Our banking personnel may not, by law, assist with investment-related questions about the stock offering. If you have any questions regarding the conversion and stock offering, call our Stock Information Center at [stock center #]. The Stock Information Center is open Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern time, and will be closed on bank holidays.

 

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RISK FACTORS

You should carefully consider the following risk factors in evaluating an investment in the shares of our common stock. Any of the following risks could have a material adverse effect on our business, operating results and financial condition and could cause the trading price of our common stock to decline, which could cause you to lose all or part of your investment. In addition to these risks and the other risks and uncertainties described elsewhere in this prospectus, there may be additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financial condition or results of operations.

Risks Related to Lending Activities

We have a substantial amount of commercial real estate and commercial business loans, and we intend to continue to increase our originations of these types of loans. These loans involve credit risks that could adversely affect our financial condition and results of operations.

As of December 31, 2024, commercial real estate (including commercial construction) and commercial business loans comprised in the aggregate 61.6% of our total gross loan portfolio. These types of loans may expose a lender to greater credit risk than residential loans secured by one- to four-family real estate because the historical losses have been higher for commercial loans. In addition, commercial real estate and commercial business loans may also involve relatively large loan balances to individual borrowers or groups of borrowers. These loans also have greater credit risk than residential loans for the following reasons:

 

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Commercial Real Estate Loans. Repayment is dependent upon income being generated in amounts sufficient to cover operating expenses and debt service.

 

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Commercial Business Loans. Repayment is generally dependent upon the successful operation of the borrower’s business.

A deterioration in economic conditions in our market areas could affect the performance of our commercial loan portfolio. Higher prices for businesses and consumers and high unemployment could negatively affect our commercial loan portfolio, if business owners or consumers are not able to make loan payments. If there was a downturn in the real estate market or our national or local economy, due to inflation, changes in interest rates or monetary policy, increased unemployment or other reasons, then this could adversely affect the value of the properties securing the loans or revenues from our borrowers’ businesses thereby increasing the risk of non-performing loans. Because commercial loans generally have a higher loan balance in comparison to residential real estate loans, the deterioration of one or a few of these loans could cause a significant increase in nonaccrual loans, which could have a material adverse effect on our financial condition and results of operations. If we foreclose on these loans, our holding period for the collateral typically is longer than for a one- to four-family residential property because there are fewer potential purchasers of the collateral, which could cause us to increase our provision for credit losses and also adversely affect our operating results and financial condition.

We have a significant number of loans secured by real estate, and a downturn in the local real estate market could negatively impact our profitability.

At December 31, 2024, approximately $529.7 million, or 96.7%, of our total gross loan portfolio was classified as real estate loans. Most of the real estate securing these loans is located in our primary lending market, Erie and Chautauqua Counties in Western New York. Future declines in the real estate values in Erie and Chautauqua Counties and surrounding markets as a result of an economic downturn could significantly impair the value of the particular collateral securing our loans and our ability to sell the collateral upon foreclosure for an amount necessary to satisfy the borrower’s obligations to us. This could require increasing our allowance for credit losses to address the decrease in the value of the real estate securing our loans, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

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Unlike larger financial institutions that are more geographically diversified, our profitability depends primarily on the general economic conditions in our primary market area. Local economic conditions have a significant impact on our residential real estate, commercial real estate, construction, commercial business and consumer lending, including, the ability of borrowers to repay these loans and the value of the collateral securing these loans.

Deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations:

 

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demand for our products and services may decrease;

 

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loan delinquencies, problem assets and foreclosures may increase;

 

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collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans;

 

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the value of our securities portfolio may decrease; and

 

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the net worth and liquidity of loan guarantors may decrease, thereby impairing their ability to honor commitments made to us.

Moreover, a significant decline in general economic conditions, caused by inflation, acts of terrorism, an outbreak of hostilities or other international or domestic calamities or other factors beyond our control could further impact these local economic conditions and could further negatively affect our financial performance. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

Our non-residential, non-owner-occupied real estate loans may expose us to increased credit risk.

At December 31, 2024, $112.6 million, or 35.1% of our total gross commercial real estate loan portfolio, consisted of loans secured by non-residential, non-owner-occupied real estate properties. At December 31, 2024, all of our non-residential, non-owner-occupied real estate loans were performing in accordance with their repayment terms. Loans secured by non-residential, non-owner-occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by non-residential, owner occupied properties because repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-residential, non-owner-occupied properties is often below that of owner-occupied properties due to lenient property maintenance standards that negatively impact the value of the collateral properties. Furthermore, some of our non-residential, non-owner-occupied real estate loan borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one credit relationship may expose us to a greater risk of loss compared to an adverse development with respect to a non-residential, owner-occupied or residential one- to four-family mortgage loan.

Our historical emphasis on residential mortgage loans exposes us to lending risks.

As of December 31, 2024, $161.3 million, or 29.5% of our total gross loan portfolio, was secured by residential, one- to four-family real estate loans and we intend to continue to make loans of this type. Residential, one- to four-family mortgage lending is generally sensitive to regional and local economic conditions that can significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. Declines in real estate values could cause some of our residential, one- to four-family mortgages to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.

 

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Deteriorating credit quality could adversely affect our earnings.

Our loan customers may not repay their loans according to their terms and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. We therefore may experience significant loan losses, which could have a material adverse effect on our operating results. A downturn in the real estate market or the local economy could exacerbate this risk. We review our allowance for credit losses for loans and unfunded commitments on a quarterly basis to ensure that it sufficiently reflects management’s estimate of expected losses as of the valuation date.

Our investment portfolio may experience credit deterioration, which could have a material adverse effect on our operating results. Numerous factors, including the credit quality of the counterparty, adverse changes in business climate, adverse actions by regulators, lack of liquidity for re-sales of certain investment securities, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio or other assets in future periods. The existence of credit deterioration within the investment portfolio could cause us to add to our allowance for credit losses. We review our allowance for credit losses on our investment portfolio on a quarterly basis to ensure that it sufficiently reflects management’s estimate of expected losses inherent within the investment portfolio.

Material additions to our allowance for credit losses on loans, unfunded commitments, or the investment portfolio also would materially decrease our net income, and the charge-off of loans may cause us to increase the allowance for credit losses. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We rely on our loan quality reviews, our experience and our evaluation of economic conditions, among other factors, in determining the amount of the allowance for credit losses on loans. We rely on underlying credit ratings of our investment portfolio, as well as other economic characteristics, to determine if a credit loss exists within our investment portfolio and whether an allowance for credit losses on investments is required. If our assumptions prove to be incorrect, our allowance for credit losses may not be sufficient to cover losses inherent in our loan, unfunded commitment, and investment portfolios, resulting in additions to our allowance for credit losses. Our increased focus on commercial loan originations has been one of the more significant factors we have taken into account in evaluating our allowance for credit losses and provision for credit losses. If we were to further increase the amount of commercial loans in our portfolio, we may decide to make increased provisions for credit losses. In addition, bank regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize further loan charge-offs, which may have a material adverse effect on our financial condition and results of operations.

We have extended off-balance sheet commitments to borrowers which expose us to credit and interest rate risk.

We enter into off-balance sheet arrangements in the normal course of business to meet the financing needs of our customers. These off-balance sheet arrangements include commitments to grant loans, unfunded commitments to fund loans and lines of credit, and commercial and standby letters of credit which would impact our liquidity and capital resources to the extent customers accept or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

 

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Risks Related To Our Business

Low demand for real estate loans may lower our profitability.

Making loans secured by real estate, including residential, one- to four-family and commercial real estate, is our primary business and primary source of revenue. If customer demand for real estate loans decreases, our profits may decrease because our alternative investments, primarily securities, generally earn less income than real estate loans. Customer demand for loans secured by real estate could be reduced due to weaker economic conditions, an increase in unemployment, a decrease in real estate values or an increase in interest rates. As interest rates rise, loan demand may slow down, and deposit expenses may increase, which could lower our net interest income and profitability.

We depend on our executive officers and key personnel to implement our business strategy and could be harmed by the loss of their services.

We believe that our growth and future success will depend in large part upon the skills of our management team led by President and CEO, Kim C. Liddell, Executive Vice President Commercial Division, Jeff Werdein and Chief Financial Officer and Treasurer Taylor Gilden. The competition for qualified personnel in the financial services industry is intense, and the loss of our key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect our business. We cannot assure you that we will be able to retain our existing key personnel or attract additional qualified personnel. Although we have employment and retentions agreement with Messrs. Liddell, Werdein and Gilden, that contain a non-compete provision, the loss of the services of one or more of our executive officers and key personnel could impair our ability to continue to develop our business strategy.

Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.

Our risk management framework is designed to minimize risk and loss to us and our customers. We seek to identify, measure, monitor, report and control our exposure to risk, including credit, interest rate, liquidity, price, operations, compliance, strategic, and reputation risks. We additionally segregate and assess information technology and human resource risks due to their complexity and over-arching risk profiles. While we deploy a diverse set of risk monitoring and mitigation techniques, including internal management and third-party engagement in risk processes; risk identification and mitigation processes are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.

The results of our operations may be adversely affected by environmental conditions.

During the course of making loans secured by real estate, we have acquired and may acquire in the future, property securing loans that are in default. There is a risk that we could be required to investigate and clean-up hazardous or toxic substances or chemical releases at such properties after acquisition in a foreclosure action, and that we may be held liable to a governmental entity or third parties for property damage, personal injury and investigation and clean-up costs incurred by such parties in connection with such contamination. In addition, the owner or former owners of contaminated sites may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from such property. An environmental assessment of real estate securing commercial loans is completed prior to loan closing. This initial assessment may indicate a higher level of testing is needed. The borrower is then required to have further testing and complete any remedial action recommended. To date, we have not been subject to any environmental claims. There can be no assurance, however, that this will remain the case in the future.

 

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Our business strategy includes growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively. Growing our operations could also cause our expenses to increase faster than our revenues.

Our business strategy primarily focuses on loan growth, funded by deposits. Achieving such growth may require us to attract customers that currently bank at other financial institutions in our market area. Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, the level of competition from other financial institutions in our market area and our ability to manage our growth. Growth opportunities may not be available or we may not be able to manage our growth successfully. If we do not manage our growth effectively, our financial condition and operating results could be negatively affected. Accordingly, any such business expansion can be expected to negatively impact our earnings until certain economies of scale are reached. Furthermore, there can be considerable costs involved in opening branches or loan production offices and expanding lending capacity, and generally a period of time is required to generate the necessary revenues to offset these costs, especially in areas in which we do not have an established presence. Accordingly, any such business expansion can be expected to negatively impact our earnings until certain economies of scale are reached. Our expenses could be further increased if we encounter delays in the opening of new branches or loan production offices.

Acquisitions may disrupt our business and dilute stockholder value.

We continually evaluate merger and acquisition opportunities of other financial institutions. As a result, negotiations may take place and future mergers or acquisitions with consideration consistent of cash and/or equity securities may occur. We would seek acquisition partners that offer us either significant market presence or the potential to expand our market footprint and improve profitability through economies of scale or expanded services. Acquired other banks or businesses may have an adverse effect on our financial results and may involve various other risks commonly associated with acquisitions, including, among other things:

 

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Payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short- and long-term;

 

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Potential exposure to unknown or contingent liabilities of the target company, as well as potential asset quality problems of the target company;

 

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Potential volatility in reported income associated with goodwill impairment losses;

 

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Difficulty and expense of integrating the operations and personnel of the target company;

 

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Inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits of acquisition;

 

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Potential disruption to our business and diversion of our management’s time and attention;

 

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The possible loss of key employees and customers of the target company; and

 

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Potential changes in banking or tax laws or regulations that may affect the target company.

Competition in our primary market area may reduce our ability to attract and retain deposits and originate loans.

We operate in a competitive market for both attracting deposits, which is our primary source of funds, and originating loans. Our most direct competition for savings deposits has come from commercial banks, credit unions, savings banks and online banks. Competition has increased in our market areas as a result of new entrants to the Erie County market area. We face additional competition for depositors from non-depository competitors such as the mutual fund industry, securities and brokerage firms, insurance companies and the U.S. Department of the Treasury. Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies,

 

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credit unions, online retail mortgage lenders and other financial service companies. Competition for loan originations and deposits may limit our future growth and earnings prospects. Some of the institutions with which we compete have substantially greater resources than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability will depend upon our continued ability to compete successfully in our market areas.

Our asset size may make it more difficult for us to compete.

Our asset size may make it more difficult to compete with other financial institutions that are larger and can more easily afford to invest in the marketing and technologies needed to attract and retain customers. Because our principal source of income is the net interest income we earn on our loans and investments after deducting interest paid on deposits and other sources of funds, our ability to generate the revenues needed to cover our expenses and finance such investments is limited by the size of our loan and investment portfolios. Accordingly, we are not always able to offer new products and services as quickly as our competitors. Our lower earnings may also make it more difficult to offer competitive salaries and benefits. In addition, our smaller customer base may make it difficult to generate meaningful non-interest income from non-traditional banking activities. Finally, as a smaller institution, we are disproportionately affected by the continually increasing costs of compliance with new banking and other regulations.

Risks Related to Interest Rates and Liquidity

Changes in interest rates could adversely affect our results of operations and financial condition.

Our results of operations and financial condition are significantly affected by changes in interest rates. We derive our income primarily from the difference or “spread” between the interest earned on loans, securities and other interest-earning assets and interest paid on deposits, borrowings and other interest-bearing liabilities. In general, the larger the spread, the more we earn. When market interest rates change, the interest we receive on our assets and the interest we pay on our liabilities will fluctuate. This can cause decreases in our spread and can adversely affect our income.

From an interest rate risk perspective, we have generally been liability sensitive, which indicates that our liabilities generally re-price faster than assets. Our earnings have been adversely impacted by an increase in interest rates which occurred in 2022 and 2023 and remained elevated in 2024, because the majority of our interest-earning assets are long-term, fixed rate mortgage-related assets that did not re-price as long-term interest rates increase. If rates continue to rise, we would expect loan applications to decrease, prepayment speeds to slow down 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 re-price, resulting in increased interest expense. A significant portion of our deposits have no contractual maturities and are likely to re-price 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 and securities portfolios. The impact on earnings is more adverse when the slope of the yield curve flattens or inverts, i.e. when short-term interest rates increase more than corresponding changes in long-term rates or when long-term rates decrease more than corresponding changes in short-term rates.

Changes in market interest rates could also reduce the value of our interest-earning assets including, but not limited to, our securities portfolio. In particular, the unrealized gains and losses on securities available for sale are reported, net of tax, in accumulated other comprehensive income which is a component of stockholders’ equity. As such, declines in the fair value of such securities resulting from increases in market interest rates may adversely affect stockholders’ equity.

In a decreasing interest rate environment, our earnings may increase or decrease. If long-term interest-earning assets do not re-price 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 would be incented to 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.

 

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We are subject to certain risks with respect to liquidity.

“Liquidity” refers to our ability to generate sufficient cash flows to support our operations and to fulfill our obligations, including commitments to originate and fund loans, to repay our wholesale borrowings and other liabilities and to satisfy the withdrawal of deposits by our customers. Our primary source of liquidity is our core deposit base, which is raised through our retail branch network. Our core deposits (which is defined as our deposits other than certificates of deposit greater than $250,000 and brokered certificates of deposit), represented 94.1% of total deposits at December 31, 2024. Additional available unused sources of liquidity include borrowings from the Federal Reserve of New York discount window, FHLBNY borrowings, brokered deposits and a line of credit with a correspondent bank. Liquidity is further provided by unencumbered, or unpledged, investment securities that totaled a fair value of $51.8 million at December 31, 2024. The availability of our line of credit with our correspondent bank may also be reduced or eliminated. Lastly, on February 27, 2025, the Federal Reserve Bank approved Lake Shore Savings Bank’s application for uncollateralized intraday credit with an effective date of March 6, 2025. With this uncollateralized intraday credit, certain transactions will not be rejected for which there are insufficient funds in Lake Shore Savings Bank’s Federal Reserve Master Account during normal hours of operation.

An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and from other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of our customer deposits. Such deposit balances can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, we could lose a relatively low-cost source of funds, which would require us to seek wholesale funding alternatives in order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income.

Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the banking industry in general. Factors that could detrimentally impact our access to liquidity sources include regulatory restrictions, disruptions in the financial markets or negative views and expectations about the prospects for the banking industry.

Any decline in available funding could adversely impact our ability to continue to implement our strategic plan, including originate loans, invest in securities, meet our expenses, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.

Adverse developments affecting the financial services industry, such as bank failures or concerns involving liquidity, may have a material effect on our operations.

Events relating to the failures of certain banking entities in March 2023, i.e. Silicon Valley Bank and Signature Bank, have caused general uncertainty and concern regarding the liquidity adequacy of the banking sector as a whole. Uncertainty may be compounded by the reach and depth of media attention, including social media, and its ability to disseminate concerns or rumors about any events of these kinds or other similar risks, and have in the past and may in the future lead to market-wide liquidity problems. These failures underscore the importance of maintaining diversified sources of funding as key measures to ensure the safety and soundness of a financial institution. As a result, market conditions and other external factors may impact the competitive landscape for deposits in the banking industry in an unpredictable manner. The current interest rate environment has increased competition for liquidity and the premium at which liquidity is available to meet funding needs.

 

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Risks Related to Economic Conditions

High inflation levels could adversely impact our business and results of operations.

The national economy continues to experience elevated levels of inflation. As of December 31, 2024, the year over year consumer price index (“CPI”) increase was 2.9% primarily driven by increases in food, transportation, and shelter prices. High inflation, if sustained, could have an adverse effect on our business. The movement in interest rates in response to elevated levels of inflation has decreased the value of our securities portfolio since 2021, resulting in an increase in unrealized losses recorded in accumulated other comprehensive loss on the stockholders’ equity section of our balance sheet. In addition, inflation-driven increases in our levels of non-interest expense could negatively impact our results of operations. High inflation and increasing interest rates could also cause increased volatility in the business environment, which could adversely affect loan demand and borrowers’ ability to repay loans.

Changes in the Federal Reserve Board’s monetary or fiscal policies could adversely affect our results of operations and financial condition.

Our earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Board has, and is likely to continue to have, an important impact on the operating results of banks through its power to implement national monetary policy, among other things, in order to curb inflation or combat a recession. The Federal Reserve Board’s actions affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks, and its influence on other monetary and fiscal policies. The monetary policies of the Federal Reserve Board may be affected by certain policy initiatives of the new Administration, which has announced tariffs on certain U.S. trading partners (and has indicated additional tariffs and retaliatory tariffs against U.S. trading partners may be announced in the future) and has implemented stricter immigration policies. Although forecasts have varied, many economists are projecting that such policy initiatives may halt productivity growth and reduce available labor, creating inflationary pressures. Under such a scenario, the Federal Reserve Board may decide to maintain the federal funds rate at a relatively elevated level for a prolonged period of time. The extent and timing of the new Administration’s policy changes and their impact on the policies of the Federal Reserve Board, as well as our business and financial results, are uncertain at this time.

Risks Related to Operations

We face significant operational risks because of our reliance on technology. Our information technology systems may be subject to failure, interruption or security breaches.

The computer systems and network infrastructure we use could be vulnerable to hardware, software, and cybersecurity issues. Our operations are dependent on our ability to protect our computer equipment from fire, power loss, telecommunications failure or other similar catastrophic event. We could also experience a breach by intentional or negligent conduct on the part of employees or other internal or external sources, including our third parties, unknown third parties or through cyber-attacks. The risk of a breach can exist whether information systems and services are in our hosted data centers or in our third party’s data centers, including cloud-based computing services. Our operational risks include the risk of malfeasance by employees or persons outside our company, errors relating to transaction processing and technology, systems failures or interruptions, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. There have been increasing efforts by third parties to breach data security at financial institutions. Such attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information, damages to systems, or other material disruptions to network access or business operations. Breaches have occurred, and may occur again, in our systems and in the systems of our third-party vendors. The risks of cyber-threats continue to evolve and are substantially escalating, and we may be required to expend significant additional resources to continue to modify or enhance our protection measures to mitigate information security vulnerabilities or incidents. Cybersecurity and the continued enhancement of our controls and processes to protect our systems, data and networks from attacks, unauthorized access or significant damage remain a priority. The occurrence of any failures, interruptions or security breaches of information systems used to process customer transactions could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition, results of operations and cash flows.

 

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We rely on third party vendors, which could expose us to and have exposed us to additional cybersecurity risks.

Third party vendors provide key components of our business infrastructure, including certain data processing and information services. Accordingly, our operations are exposed to the risks that these vendors will not perform in accordance with our contractual agreements with them, or if such an agreement is not renewed by the third-party vendor or is renewed on terms less favorable to us. If our third-party providers encounter difficulties, or if we have difficulty communicating with those service providers, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected, which could have a material adverse effect on our financial condition and results of operations. Threats to information security also exist in the processing of customer information through various other vendors and their personnel. To our knowledge, the services and programs provided to us by third parties have not experienced any material security breaches. However, the existence of cyber-attacks or security breaches at third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner.

We continually encounter technological change.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Our largest competitors have substantially greater resources to invest in technological improvements. Furthermore, new payment services developed and offered by non-financial institution competitors pose an increasing threat to the traditional payment services offered by financial institutions. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers and we may not be able to effectively deploy new technologies such as Artificial Intelligence to improve our operational efficiency. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on us.

We may be subject to risks and losses resulting from fraudulent activities that could adversely impact our financial performance and results of operations.

As a bank, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. We are most subject to fraud and compliance risk in connection with the origination of loans, ACH transactions, wire transactions, ATM transactions, checking transactions, and debit cards that we have issued to our customers and through our online banking portals. We maintain a system of internal controls and insurance coverage to mitigate against such risks, including data processing system failures and errors, and customer fraud. If our internal controls fail to prevent or detect any such occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.

Risks Related To Laws and Regulations

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

Lake Shore Savings Bank and Lake Shore Bancorp are subject to extensive regulation, supervision and examination by the OCC and the Federal Reserve Board and following the charter conversion the NYSDFS, the

 

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FDIC and the Federal Reserve Board. Such regulation and supervision governs the activities in which an institution and its holding companies may engage and are intended primarily for the protection of federal deposit insurance funds and the depositors and borrowers of Lake Shore Savings Bank, rather than for our stockholders. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for credit losses. Lake Shore Savings Bank, Lake Shore Federal Bancorp and Lake Shore, MHC were all subject to enforcement actions with their regulators which were all lifted in late 2024 and 2025. For additional information regarding these enforcement actions, please see “Supervision and Regulation—Consent Order with the OCC and Written Agreement with the Federal Reserve Bank of Philadelphia.” These regulations, along with existing tax, accounting, securities, insurance and monetary laws, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firms. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of operations, and our interpretation of those changes.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act and related regulations may subject us to fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. Once such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers that open new financial accounts. Failure to comply with these regulations could result in fines or sanctions.

We are subject to the Community Reinvestment Act (“CRA”) and fair lending laws, and failure to comply with these laws could lead to material penalties.

The CRA, the Equal Credit Opportunity Act, the Fair Housing Act, and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The CFPB, the United States Department of Justice, and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including paying damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.

We may be required to raise additional capital in the future, but that capital may not be available when it is needed, or it may only be available on unacceptable terms, which could adversely affect our financial condition and results of operations.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. We may at some point, however, need to raise additional capital to support continued growth or be required by our regulators to increase our capital resources. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we may not be able to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations and pursue our growth strategy could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.

 

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The Federal Reserve Board may require us to commit capital resources to support Lake Shore Savings Bank, and we may not have sufficient access to such capital resources.

Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to attempt to borrow the funds or raise capital. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by Lake Shore Bancorp to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations. Moreover, it is possible that we will be unable to borrow funds when we need to do so.

We qualify as a smaller reporting company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to smaller reporting companies could make our common stock less attractive to investors.

We are a smaller reporting company, and, for as long as we continue to qualify as a smaller reporting company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to smaller reporting companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and two years of audited financial statements in our annual report instead of three years. As long as we are a smaller reporting company that is also not an accelerated filer, we will not be subject to Section 404(b) of the Sarbanes-Oxley Act, which requires that our independent registered public accounting firm review and attest as to the effectiveness of our internal control over financial reporting. In addition, as a non-accelerated filer, we will have longer deadlines to file our periodic reports with the Securities and Exchange Commission.

We would remain a smaller reporting company and a non-accelerated filer for so long as our voting and non-voting equity held by non-affiliates (“public float”) is less than $250 million or our annual revenues are less than $100 million and our public float is less than $700 million. Public float is determined each year as of the end of a company’s second fiscal quarter applicable at the end of the fiscal year involved.

As a result of our smaller reporting company status and non-accelerated filer status, our stockholders may not have access to certain information they may deem important, and investors may find our common stock less attractive if we choose to rely on these exemptions. This could result in a less active trading market for our common stock and the price of our common stock may be more volatile.

Other Risks Related to Our Business

We are a community bank and our ability to maintain our reputation, which is critical to the success of our business, may materially adversely affect our performance.

We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our market area and contiguous areas. Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, cybersecurity incidents and questionable or fraudulent activities of our customers. Lake Shore Savings Bank, Lake Shore Federal Bancorp and Lake Shore, MHC were all subject to enforcement actions with their regulators which were all lifted in late 2024 and 2025. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers and employees, costly litigation and increased governmental regulation, any or all of which could adversely affect our business and operating results.

 

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Legal and regulatory proceedings and related matters could adversely affect us.

We have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. There could be substantial costs and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.

Severe weather, acts of terrorism, geopolitical and other external events could impact our ability to conduct business.

Weather-related events have adversely impacted our market area in recent years, especially areas located near flood prone areas. Such events that may cause significant flooding and other storm-related damage may become more common events in the future. Financial institutions have been, and continue to be, targets of terrorist threats aimed at compromising operating and communication systems. Such events could cause significant damage, impact the stability of our facilities and result in additional expenses, impair the ability of our borrowers to repay their loans, reduce the value of collateral securing repayment of our loans, and result in the loss of revenue. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition. Additionally, financial markets may be adversely affected by the current or anticipated impact of military conflict, including wars in Russia and Ukraine, and the Middle East, terrorism or other geopolitical events.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, and, as a result, stockholders and depositors could lose confidence in our financial reporting, which could adversely affect our business, the trading price of our stock and our ability to attract additional deposits.

Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”), requires us to evaluate our internal control over financial reporting and provide an annual management report on our internal control over financial reporting, including, among other matters, management’s assessment of the effectiveness of internal control over financial reporting. We have established a process to document and evaluate its internal controls over financial reporting in order to satisfy the Sarbanes-Oxley Act and related regulations, which require management consideration of our internal controls over financial reporting on an annual basis. In this regard, management has dedicated internal resources and adopted a detailed work plan to (i) assess and document the adequacy of internal controls over financial reporting, (ii) take steps to improve control processes, where appropriate, (iii) validate through testing that controls are functioning as documented and (iv) maintain a continuous internal reporting and improvement process for internal control over financial reporting. Our management and Audit Committee have made compliance with Section 404 a high priority. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement appropriate new or improved controls in response to changes in financial processes or reporting, or difficulties encountered in their implementation could harm our operating results or cause us to fail to meet our reporting obligations. If we fail to correct any significant deficiencies in the design or operating effectiveness of internal controls over financial reporting or fails to prevent fraud, current and potential stockholders and depositors could lose confidence in our financial reporting, which could harm our business and the trading price of our stock.

 

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Risks Related to the Stock Offering

We will have a relatively high capital level after the completion of the conversion and stock offering. We expect our return on equity will be low following the stock offering, which could negatively affect the trading price of our shares of common stock.

Net income divided by average stockholders’ equity, known as “return on equity,” is a ratio many investors use to compare the performance of financial institutions. Our return on average equity was 5.62% for the year ended December 31, 2024, and 5.78% for the year ended December 31, 2023. Our consolidated average equity to average assets was 12.43% for the for the year ended December 31, 2024, and 11.62% for the year ended December 31, 2023. At December 31, 2024, our total stockholders’ equity was $89.9 million. Assuming the completion of the conversion and stock offering, our pro forma stockholders’ equity at December 31, 2024 is estimated to range from $125.4 million at the minimum of the offering range to $145.9 million at the adjusted maximum of the offering range. We expect our return on equity to be lower than our peers unless and until we are able to leverage our capital including the additional capital from the stock offering. Our return on equity also will be negatively affected by added expenses associated with our employee stock ownership plan and the stock-based benefit plans we intend to adopt. Unless and until we can increase our earnings and leverage our capital, including the capital to be raised in the conversion and stock offering, we expect that our return on equity will be low, which may reduce the trading price of our shares of common stock.

The future price of our shares of common stock may be less than the $10.00 purchase price per share in the stock offering.

If you purchase shares of common stock in the stock offering, you may not be able to sell them later at or above the $10.00 purchase price. In many cases, shares of common stock issued by newly converted savings institutions or mutual holding companies have traded below the initial offering price. The aggregate purchase price of the shares of common stock sold in the stock offering will be based on an independent appraisal. The independent appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The independent appraisal is based on certain estimates, assumptions and projections, all of which are subject to change from time to time. After the shares begin trading, the trading price of our common stock will be determined by the marketplace, and may be influenced by many factors, including prevailing interest rates, the overall performance of the economy, changes in federal tax laws, new regulations, investor perceptions of Lake Shore Bancorp and the outlook for the financial services industry in general. Price fluctuations in our common stock may be unrelated to our operating performance.

We have broad discretion in using the proceeds of the stock offering. Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance.

We intend to invest between $20.2 million and $31.9 million of the net proceeds of the stock offering in Lake Shore Bank. We also expect to use a portion of the net proceeds we retain to fund a loan to our employee stock ownership plan to purchase shares of common stock in the stock offering. We may use the remaining net proceeds to invest in short-term investments and for general corporate purposes, including repurchasing shares of our common stock and paying dividends. Lake Shore Savings Bank may use the net proceeds it receives to fund new loans, reduce wholesale borrowings, expand its retail banking franchise by establishing or acquiring new branches, establishing loan production offices or by acquiring other financial institutions or other financial services companies, or for other general corporate purposes. However, except for funding the loan to the employee stock ownership plan, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have broad discretion in determining the amount of the net proceeds we apply to different uses and when we apply or reinvest such proceeds. We have not established a timetable for investing the net proceeds, and we cannot predict how long we will require to invest the net proceeds. Our failure to reinvest these funds effectively would reduce our profitability and may adversely affect the value of our common stock.

Our stock-based benefit plans will increase our expenses and reduce our income.

We intend to adopt one or more new stock-based benefit plans after the conversion and stock offering, subject to stockholder approval, which will increase our annual compensation and benefit expenses related to the

 

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stock options and stock awards granted to participants under the new stock-based benefit plans. The actual amount of these new stock-related compensation and benefit expenses will depend on the number of options and stock awards granted under the plans, the fair market value of our stock or options on the date of grant, the vesting period, and other factors which we cannot predict at this time. If we adopt stock-based benefit plans within 12 months following the conversion and stock offering, the shares of common stock reserved for issuance pursuant to awards of restricted stock and grants of options under such plans would be limited to 4% and 10%, respectively, of the total shares of our common stock sold in the stock offering. If we adopt stock-based benefit plans more than 12 months after the completion of the conversion and stock offering, we may award restricted shares of common stock or grant options in excess of these amounts, which would further increase costs.

In addition, we will recognize expense for our employee stock ownership plan when shares are committed to be released to participants’ accounts, and we will recognize expense for restricted stock awards and stock options over the vesting period of awards made to recipients. The expense in the first year following the stock offering for our employee stock ownership plan and for our new stock-based benefit plans, assuming such plans had been implemented at the beginning of the year, is estimated to be approximately $1.4 million ($1.2 million after tax) at the adjusted maximum of the offering range as set forth in the pro forma financial information under “Pro Forma Data,” assuming the $10.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock. For further discussion of our proposed stock-based plans, see “Management - Benefits to be Considered Following Completion of the Conversion and Stock Offering.”

The implementation of stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.

We intend to adopt one or more new stock-based benefit plans following the conversion and stock offering. These plans may be funded either through open market purchases of our common stock or from the issuance of authorized but unissued shares of common stock. Our ability to repurchase shares of our common stock to fund these plans will be subject to many factors, including applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading price of our stock, our capital levels, alternative uses for our capital and our financial performance. While our intention is to fund the new stock-based benefit plans through open market purchases, stockholders would experience a 5.97% dilution in ownership interest if newly issued shares of our common stock are used to fund stock options in an amount equal to 10% of the shares sold in the stock offering, and all such stock options are exercised, and a 2.48% dilution in ownership interest if newly issued shares of our common stock are used to fund shares of restricted common stock in an amount equal to 4% of the shares sold in the stock offering. Such dilution would also reduce earnings per share. If we adopt the plans more than 12 months following the conversion and stock offering, new stock-based benefit plans would not be subject to these limitations and stockholders could experience greater dilution.

Although the implementation of new stock-based benefit plans would be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.

We have not determined when we will adopt one or more new stock-based benefit plans. Stock-based benefit plans adopted more than 12 months following the completion of the conversion and stock offering may exceed regulatory restrictions on the size of stock-based benefit plans adopted within 12 months, which would further increase our costs.

If we adopt stock-based benefit plans more than 12 months following the completion of the conversion and stock offering, then grants of shares of common stock or stock options under our proposed stock-based benefit plans may exceed 4% and 10%, respectively, of shares of common stock sold in the stock offering. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “—Our stock-based benefit plans will increase our expenses and reduce our income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in “—The implementation of stock-based benefit plans may dilute your ownership interest. Historically, stockholders have approved these stock-based benefit plans.” Although the implementation of stock-based benefit plans would be subject to stockholder approval, the timing of the implementation of such plans will be at the discretion of our board of directors.

 

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Various factors may make takeover attempts more difficult to achieve.

Certain provisions of our articles of incorporation and bylaws and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of Lake Shore Bancorp without our board of directors’ approval. Under regulations applicable to the conversion and stock offering, for a period of three years following completion of the conversion and stock offering, no person may offer to acquire or acquire beneficial ownership of more than 10% of our common stock without prior approval of the Federal Reserve Board. Under federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve Board and receive the Federal Reserve Board’s non-objection before acquiring control of a bank holding company, such as Lake Shore Bancorp. There also are provisions in our articles of incorporation and bylaws that we may use to delay or block a takeover attempt, including a provision that prohibits any person from voting more than 10% of our outstanding shares of common stock. Furthermore, shares of restricted stock and stock options that we may grant to employees and directors, stock ownership by our management and directors and other factors may make it more difficult for companies or persons to acquire control of Lake Shore Bancorp without the consent of our board of directors. Taken as a whole, these statutory or regulatory provisions and provisions in our articles of incorporation and bylaws could result in our being less attractive to a potential acquirer and therefore could adversely affect the market price of our common stock. For additional information, see “Restrictions on Acquisition of Lake Shore Bancorp, Inc.” and “Management - Benefits to be Considered Following Completion of the Conversion and Stock Offering.”

Our articles of incorporation provide that, subject to limited exception, state and federal courts in the State of Maryland are the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, and other employees.

The articles of incorporation of Lake Shore Bancorp provide that, unless Lake Shore Bancorp consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of Lake Shore Bancorp, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of Lake Shore Bancorp to Lake Shore Bancorp or its stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Maryland General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the State of Maryland, in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. This exclusive forum provision, which does not apply to claims arising under the federal securities laws, may limit a stockholder’s ability to bring a claim in a judicial forum it finds favorable for disputes with Lake Shore Bancorp and its directors, officers, and other employees or may cause a stockholder to incur additional expense by having to bring a claim in a judicial forum that is distant from where the stockholder resides, or both. In addition, if a court were to find this exclusive forum provision to be inapplicable or unenforceable in a particular action, we may incur additional costs associated with resolving the action in another jurisdiction, which could have a material adverse effect on our financial condition and results of operations.

There may be a limited trading market in our shares of common stock, which would hinder your ability to sell our common stock and may lower the market price of our common stock.

We expect that our common stock will be listed on the Nasdaq Global Market under the symbol “LSBK” upon the completion of the conversion and stock offering. The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. Purchasers of common stock in this offering should have long-term investment intent and should recognize that there may be a limited trading market in the common stock. This may make it difficult to sell the common stock after the completion of the conversion and stock offering and may have an adverse impact on the price at which the common stock can be sold.

 

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You may not revoke your decision to purchase Lake Shore Bancorp common stock in the subscription offering or any community offering after you send us your order.

Funds submitted or automatic withdrawals authorized in connection with the purchase of shares of common stock in the subscription offering and in any community offering will be held by us until the completion or termination of the conversion and stock offering, including any extension of the expiration date and consummation of any syndicated community offering. Because completion of the conversion and stock offering will be subject to regulatory approvals and an update of the independent appraisal prepared by RP Financial, among other factors, there may be one or more delays in completing the conversion and stock offering. Orders submitted in the subscription offering and in any community offering are irrevocable, and purchasers will have no access to their funds unless the stock offering is terminated, or extended beyond [extension date], or the number of shares to be sold in the stock offering is increased to more than 6,612,500 shares or decreased to less than 4,250,000 shares.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The summary information presented below at each date or for each of the periods presented is derived in part from the consolidated financial statements of Lake Shore Federal Bancorp. The financial condition data at December 31, 2024 and 2023 and the operating data for the years ended December 31, 2024 and 2023 were derived from the audited consolidated financial statements of Lake Shore Federal Bancorp included elsewhere in this prospectus. The following information is only a summary and should be read in conjunction with the consolidated financial statements and related notes of Lake Shore Federal Bancorp beginning on page F-1 of this prospectus.

 

		At December 31,
		2024				2023
		(In thousands)
Selected Financial Condition Data:
Total assets		$	685,504			$	725,118
Cash and cash equivalents			33,131				53,730
Securities, at fair value			56,495				60,442
Loans receivable, net			544,620				555,828
Bank-owned life insurance			29,340				29,355
Federal Home Loan Bank stock, at cost			1,157				2,293
Deposits			572,978				590,924
Borrowings			10,250				35,250
Total stockholders’ equity			89,868				86,273

 

		For the Years Ended December 31,
		2024				2023
		(In thousands, except per share data)
Selected Operating Data:
Interest income		$	34,804			$	33,755
Interest expense			13,741				9,397
Net interest income			21,063				24,358
(Credit) provision for credit losses			(1,479	)			(1,043	)
Net interest income after (credit) provision for credit losses			22,542				25,401
Non-interest income			3,304				2,635
Non-interest expense			19,980				21,817
Income before income taxes			5,866				6,219
Income tax expense			935				1,399
Net income		$	4,931			$	4,820
Basic and diluted earnings per share		$	0.88			$	0.82

 

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		At or For the Years Ended December 31,
		2024				2023
Performance Ratios:
Return on average assets			0.70	%			0.67	%
Return on average equity			5.62	%			5.78	%
Interest rate spread(1)			2.62	%			3.23	%
Net interest margin(2)			3.21	%			3.62	%
Non-interest expense to average assets			2.83	%			3.04	%
Efficiency ratio(3)			82.00	%			80.83	%
Average interest-earning assets to average interest-bearing liabilities			127.88	%			128.06	%
Average equity to average assets			12.43	%			11.62	%
Capital Ratios(4):
Average equity to average assets			12.64	%			11.15	%
Tier 1 capital to average assets			13.83	%			12.68	%
Asset Quality Ratios:
Allowance for credit losses as a percentage of total loans			0.93	%			1.16	%
Allowance for credit losses as a percentage of non-performing loans			134.91	%			193.09	%
Net (charge-offs) recoveries to average outstanding loans during the year			0.00	%			0.00	%
Non-performing loans as a percentage of total loans			0.69	%			0.60	%
Non-performing loans as a percentage of total assets			0.55	%			0.47	%
Total non-performing assets as a percentage of total assets			0.55	%			0.47	%
Other:
Number of branches			10				11
Number of full-time equivalent employees			97				117

 

(1)	Represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(2)	Represents net interest income as a percentage of average interest-earning assets.

(3)	Represents non-interest expenses divided by the sum of net interest income and non-interest income.

(4)	Lake Shore Savings Bank only and ratios reflected are based on averages derived in conformity with the Federal Financial Institutions Examination Council (“FFIEC”) Call Report.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “would,” “should,” “could” or “may,” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

•

statements of our goals, intentions and expectations;

 

•

statements regarding our business plans, prospects, growth and operating strategies;

 

•

statements regarding the quality of our loan and investment portfolios; and

 

•

estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

•

inflation, tariffs and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;

 

•

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

•

events involving the failure of financial institutions may adversely affect our business, and the market price of our common stock;

 

•

changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;

 

•

our ability to access cost-effective funding;

 

•

fluctuations in real estate values and both residential and commercial real estate market conditions;

 

•

demand for loans and deposits in our market area;

 

•

our ability to implement and change our business strategies;

 

•

competition among depository and other financial institutions;

 

•

adverse changes in the securities or secondary mortgage markets, including our ability to sell loans in the secondary market;

 

•

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

•

changes in the quality or composition of our loan or investment portfolios;

 

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•

technological changes that may be more difficult or expensive than expected;

 

•

the inability of third-party providers to perform as expected;

 

•

a failure or breach of our operational or security systems or infrastructure, including cyberattacks;

 

•

our ability to manage market risk, credit risk and operational risk in the current economic environment;

 

•

our ability to enter new markets successfully and capitalize on growth opportunities;

 

•

our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;

 

•

changes in consumer spending, borrowing and savings habits;

 

•

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

 

•

our ability to retain key employees;

 

•

any future FDIC insurance premium increases or special assessments may adversely affect our earnings;

 

•

our ability to prevent or mitigate fraudulent activity;

 

•

our ability to evaluate the amount and timing of recognition of future tax assets and liabilities;

 

•

political instability or civil unrest;

 

•

acts of war or terrorism or pandemics such as the recent COVID-19 pandemic;

 

•

our ability to control operating costs and expenses, including compensation expense associated with equity allocated or awarded to our employees;

 

•

changes in the financial condition, results of operations or future prospects of issuers of securities that we own; and

 

•

our inability to sell our foreclosed assets, net at an amount equal to or greater than the carrying amount.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. See “Risk Factors” beginning on page 16. Except as required by applicable law or regulation, we do not undertake, and we specifically disclaim any obligation, to release publicly the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

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HOW WE INTEND TO USE THE PROCEEDS FROM THE STOCK OFFERING

Although we cannot determine what the actual net proceeds will be from the sale of the shares of common stock by Lake Shore Bancorp in the stock offering until the stock offering is completed, we anticipate that the net proceeds will be between $40.4 million and $63.7 million.

We intend to use the net proceeds as follows:

 

		Based Upon the Sale at $10.00 Per Share of:
		4,250,000 Shares								5,000,000 Shares								5,750,000 Shares								6,612,500 Shares(1)
		Amount				Percent of Net Proceeds				Amount				Percent of Net Proceeds				Amount				Percent of Net Proceeds				Amount				Percent of Net Proceeds
		(Dollars in thousands)
Gross offering proceeds		$	42,500							$	50,000							$	57,500							$	66,125
Less: offering expenses			(2,130	)							(2,224	)							(2,317	)							(2,424	)
Net offering proceeds		$	40,370				100.0	%		$	47,776				100.0	%		$	55,183				100.0	%		$	63,701				100.0	%
Distribution of net proceeds:
To Lake Shore Bank		$	20,185				50.0	%		$	23,888				50.0	%		$	27,592				50.0	%		$	31,851				50.0	%
To fund loan to employee stock ownership plan		$	3,400				8.4	%		$	4,000				8.4	%		$	4,600				8.3	%		$	5,290				8.3	%
Retained by Lake Shore Bancorp		$	16,785				41.6	%		$	19,888				41.6	%		$	22,991				41.7	%		$	26,560				41.7	%

 

(1)	As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will reduce Lake Shore Savings Bank’s deposits. The net proceeds may vary because total expenses relating to the stock offering may be more or less than our estimates. For example, our expenses would increase if all the shares offered were not sold in the subscription and community offerings and instead a portion of the shares were sold in a syndicated community offering.

Lake Shore Bancorp may use the proceeds it retains from the stock offering:

 

•

to invest in securities;

 

•

to repurchase shares of its common stock;

 

•

to pay cash dividends to stockholders;

 

•

to finance the potential acquisition of financial institutions or financial services companies, although we do not currently have any agreements or understandings regarding any specific acquisition transaction; and

 

•

for other general corporate purposes.

See “Our Dividend Policy” for a discussion of our expected dividend policy following the completion of the conversion and stock offering. Under current federal regulations, we may not repurchase shares of our common stock during the first year following the completion of the conversion and stock offering, except when extraordinary circumstances exist and with prior regulatory approval, or except to fund the granting of restricted stock awards (which would require notification to the Federal Reserve Board) or tax-qualified employee stock benefit plans.

 

36

Lake Shore Bank may use the net proceeds it receives from the stock offering:

 

•

to fund new loans;

 

•

to enhance existing products and services, hire additional employees and support growth and the development of new products and services;

 

•

to expand its banking franchise by establishing or acquiring new branches, establishing loan production offices or by acquiring other financial institutions or other financial services companies as opportunities arise, although we do not currently have any understandings or agreements to acquire a financial institution or other entity;

 

•

to invest in securities;

 

•

to potentially restructure Lake Shore Bank’s investment securities portfolio;

 

•

to reduce wholesale borrowings; and

 

•

for other general corporate purposes.

Initially, a substantial portion of the net proceeds will be invested in short-term investments, investment-grade debt obligations and mortgage-backed securities. We have not determined specific amounts of the net proceeds that would be used for the purposes described above. The use of the proceeds outlined above may change based on many factors, including, but not limited to, changes in interest rates, equity markets, laws and regulations affecting the financial services industry, the attractiveness of potential acquisitions to expand our operations, and overall market conditions. The use of the proceeds may also change depending on our ability to receive regulatory approval to establish new branches or acquire other financial institutions.

We expect our return on equity to be low until we are able to reinvest effectively the additional capital raised in the stock offering. Until we can increase our net interest income and noninterest income, we expect our return on equity to be below the industry average, which may negatively affect the value of our common stock. See “Risk Factors—Risks Related to the Stock Offering—Our failure to effectively deploy the net proceeds may have an adverse effect on our financial performance” and “—Our return on equity may be low following the offering. This could negatively affect the trading price of our shares of common stock.”

OUR DIVIDEND POLICY

In 2024, Lake Shore Federal Bancorp resumed paying a cash dividend of $0.18 per share to its public stockholders. On March 11, 2025, Lake Shore Federal Bancorp suspended the payment of cash dividends pending the completion of the conversion from the mutual holding company to the stock holding company form of organization and related stock offering. Following completion of the stock offering, our board of directors intends to resume paying cash dividends on our shares of common stock, subject to our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. However, no decision has been made with respect to the amount of any dividend payments which will be determined once the board of directors can evaluate the amount of common stock outstanding. We cannot assure you that any such dividends will not be reduced or eliminated in the future.

Lake Shore Bancorp will not be permitted to pay dividends on its common stock if its stockholders’ equity would be reduced below the amount of the liquidation account established by Lake Shore Bancorp in connection with the conversion and stock offering. The source of dividends will depend on the net proceeds retained by Lake Shore Bancorp and earnings thereon, and dividends from Lake Shore Savings Bank. In addition, Lake Shore Bancorp will be subject to state law limitations and federal bank regulatory policy on the payment of dividends. Maryland law generally limits dividends if the corporation would not be able to pay its debts in the usual course of business after giving effect to the dividend or if the corporation’s total assets would be less than the corporation’s total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution.

 

37

The Federal Reserve Board has issued a policy statement providing that dividends should be paid only out of current earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and overall financial condition. Regulatory guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the holding company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the holding company’s overall rate or earnings retention is inconsistent with its capital needs and overall financial condition.

After the completion of the conversion and stock offering, Lake Shore Bank will not be permitted to pay dividends on its capital stock owned by Lake Shore Bancorp, its sole stockholder, if Lake Shore Bank’s stockholder’s equity would be reduced below the amount of the liquidation account established in connection with the conversion and stock offering. In addition, Lake Shore Bank will not be permitted to make a capital distribution if, after making such distribution, it would be undercapitalized under applicable regulation. The FDIC has the authority to prohibit Lake Shore Bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of Lake Shore Bank. Lake Shore Bank must file an application with the NYSDFS for approval of a capital distribution if the total capital distributions for the applicable calendar year exceed the sum of its net income for that year to date plus its retained net income for the preceding two years.

Any payment of dividends by Lake Shore Bank to Lake Shore Bancorp that would be deemed to be drawn from Lake Shore Bank’s bad debt reserves established before 1988, if any, would require a payment of taxes at the then-current tax rate by Lake Shore Bank on the amount of earnings deemed to be removed from the pre-1988 bad debt reserves for such distribution. Lake Shore Bank does not intend to make any distribution that would create such a federal tax liability. See “The Conversion and Stock Offering—Liquidation Rights.” For further information concerning additional federal law and regulations regarding the ability of Lake Shore Bank to make capital distributions, including the payment of dividends to Lake Shore Bancorp, see “Taxation—Federal Taxation.”

We intend to file a consolidated federal tax return with Lake Shore Bank. Accordingly, it is anticipated that any cash distributions we make to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal tax purposes. Additionally, during the three-year period following the conversion and stock offering, we will not be permitted to make any capital distribution to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.

MARKET FOR THE COMMON STOCK

Lake Shore Federal Bancorp’s common stock is currently listed on the Nasdaq Global Market under the symbol “LSBK.” Upon completion of the conversion and stock offering, we expect the shares of common stock of Lake Shore Bancorp will also be listed on the Nasdaq Global Market under the symbol “LSBK.” In order to list our stock on the Nasdaq Global Market, we are required to have at least three broker-dealers who will make a market in our common stock. As of [record date], Lake Shore Federal Bancorp had _____ registered market makers in its common stock.

At the close of business on December 31, 2024, there were 5,735,226 shares of Lake Shore Federal Bancorp common stock outstanding, of which 2,098,351 shares were publicly held shares (shares held by stockholders other than Lake Shore, MHC), and approximately 643 stockholders of record (excluding stockholders who hold shares in street name through a broker).

On January 29, 2025, the business day immediately preceding the public announcement of the conversion and stock offering, the closing price of Lake Shore Federal Bancorp common stock was $13.25 per share, as reported by the Nasdaq Stock Market. On _________, 2025, the most recent practicable date before the printing of this prospectus, the closing price of Lake Shore Federal Bancorp common stock was $_____per share, as reported by the Nasdaq Stock Market. On the effective date of the conversion and stock offering, all publicly held shares of Lake Shore Federal Bancorp common stock, including shares of common stock owned by our officers and directors, will be converted automatically into and become the right to receive a number of shares of Lake Shore Bancorp common stock determined pursuant to the exchange ratio. See “The Conversion and Stock Offering—Share Exchange Ratio for Current Stockholders.” Options to purchase shares of Lake Shore Federal Bancorp common stock will be converted into options to purchase a number of new shares of Lake Shore Bancorp common stock determined pursuant to the exchange ratio, with the same aggregate exercise price. See “Beneficial Ownership of Common Stock.”

 

38

HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

At December 31, 2024, Lake Shore Savings Bank had opted in, and was in compliance with, the community bank leverage ratio framework and was considered “well capitalized.”

The table below sets forth the historical equity capital and regulatory capital of Lake Shore Savings Bank at December 31, 2024, and the pro forma equity capital and regulatory capital of Lake Shore Bank after giving effect to the sale of shares of common stock at $10.00 per share. The table also compares historical and pro forma capital levels to those required to be considered “well capitalized.” The table assumes that Lake Shore Bank receives 50% of the net offering proceeds. See “How We Intend to Use the Proceeds From the Stock Offering.”

 

		Lake Shore Savings Bank Historical at December 31, 2024								Lake Shore Bank Pro Forma at December 31, 2024 Based Upon the Sale in the Stock Offering of:
										4,250,000 Shares								5,000,000 Shares								5,750,000 Shares								6,612,500 Shares(1)
		Amount				Percent of Assets				Amount				Percent of Assets				Amount				Percent of Assets				Amount				Percent of Assets				Amount				Percent of Assets
		(Dollars in thousands)
Equity		$	87,280				12.74	%		$	102,365				14.51	%		$	105,168				14.83	%		$	107,972				15.15	%		$	111,196				15.51	%
Tier 1 leverage capital (2)		$	97,244				13.83	%		$	112,329				15.53	%		$	115,132				15.84	%		$	117,936				16.14	%		$	121,160				16.49	%
Tier 1 leverage requirement			35,150				5.00				36,160				5.00				36,345				5.00				36,530				5.00				36,743				5.00
Excess		$	62,094				8.83	%		$	76,169				10.53	%		$	78,787				10.84	%		$	81,406				11.14	%		$	84,417				11.49	%
Reconciliation of capital infused into Lake Shore Bank:
Net proceeds										$	20,185							$	23,888							$	27,592							$	31,851
Less: Common stock acquired by stock-based benefit plan											(1,700	)							(2,000	)							(2,300	)							(2,645	)
Less: Common stock acquired by employee stock ownership plan											(3,400	)							(4,000	)							(4,600	)							(5,290	)
Pro forma increase										$	15,085							$	17,888							$	20,692							$	23,916

 

(1)	As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

(2)	Tier 1 leverage capital levels are shown as a percentage of total average assets.

 

39

CAPITALIZATION

The following table presents the historical consolidated capitalization of Lake Shore Federal Bancorp at December 31, 2024 and the pro forma consolidated capitalization of Lake Shore Bancorp after giving effect to the conversion and stock offering based upon the assumptions set forth in the “Pro Forma Data” section.

 

		Lake Shore Federal Bancorp Historical at December 31, 2024				Lake Shore Bancorp Pro Forma at December 31, 2024, Based Upon the Sale at $10.00 Per Share of:
						4,250,000 Shares				5,000,000 Shares				5,750,000 Shares				6,612,500 Shares(1)
		(Dollars in thousands)
Deposits (2)		$	572,978			$	572,978			$	572,978			$	572,978			$	572,978
Borrowed funds			10,250				10,250				10,250				10,250				10,250
Total deposits and borrowed funds		$	583,228			$	583,228			$	583,228			$	583,228			$	583,228
Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized (post-conversion) (3)			—				—				—				—				—
Common stock, $0.01 par value, 40,000,000 shares authorized (post-conversion); shares to be issued as reflected (3) (4)			68				67				79				91				104
Additional paid-in capital (3)			31,512				58,437				65,832				73,226				81,731
Lake Shore, MHC capital contribution			—				372				372				372				372
Retained earnings (5)			82,805				82,805				82,805				82,805				82,805
Accumulated other comprehensive loss			(9,964	)			(9,964	)			(9,964	)			(9,964	)			(9,964	)
Treasury stock, at cost			(13,304	)			—				—				—				—
Unallocated common stock to be held by employee stock ownership plan (6)			(938	)			(4,338	)			(4,938	)			(5,538	)			(6,228	)
Common stock acquired by stock-based benefit plan (7)			(311	)			(2,011	)			(2,311	)			(2,611	)			(2,956	)
Total stockholders’ equity		$	89,868			$	125,368			$	131,875			$	138,381			$	145,864
Pro Forma Shares Outstanding
Shares offered for sale			—				4,250,000				5,000,000				5,750,000				6,612,500
Exchange shares issued			—				2,440,823				2,871,557				3,302,290				3,797,635
Total shares outstanding			—				6,690,823				7,871,557				9,052,290				10,410,135
Total stockholders’ equity as a percentage of total assets			13.11	%			17.39	%			18.13	%			18.85	%			19.67	%
Tangible equity as a percentage of tangible assets			13.11	%			17.39	%			18.13	%			18.85	%			19.67	%

 

(1)	As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

(2)	Does not reflect withdrawals from deposit accounts to purchase shares of common stock in the conversion and stock offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals.

(3)

Lake Shore Federal Bancorp currently has 25,000,000 authorized shares of common stock, $0.01 par value per share, and 1,000,000 authorized shares of preferred stock, par value $0.01 per share. On a pro forma basis, common stock and additional paid-in capital are revised to reflect the number of shares of Lake Shore Bancorp common stock to be outstanding after the completion of the conversion and stock offering.

(4)

No effect has been given to the issuance of additional shares of Lake Shore Bancorp common stock pursuant to the exercise of options under one or more stock-based benefit plans. If the plans are implemented within the first year after the closing of the stock offering, an amount up to 10% of the shares of Lake Shore Bancorp common stock sold in the stock offering will be reserved for issuance upon the exercise of options under the plans. No effect has been given to the exercise of options currently outstanding. See “Management.”

(5)	The retained earnings of Lake Shore Bank will be substantially restricted after the conversion and stock offering. See “The Conversion and Stock Offering—Liquidation Rights” and “Supervision and Regulation—Federal Banking Regulation—Capital Distributions.”

(6)

Assumes that 8% of the shares sold in the stock offering will be acquired by the employee stock ownership plan financed by a loan from Lake Shore Bancorp. The loan will be repaid principally from Lake Shore Bancorp’s contributions to the employee stock ownership plan. Since Lake Shore Bancorp will finance the employee stock ownership plan debt, the debt will be eliminated through consolidation and no liability will be reflected on Lake Shore Bancorp’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity.

 

40

(7)

Assumes a number of shares of common stock equal to 4% of the shares of common stock to be sold in the stock offering will be purchased for grant by one or more stock-based benefit plans. The funds to be used by such plans to purchase the shares will be provided by Lake Shore Bancorp. The dollar amount of common stock to be purchased is based on the $10.00 per share purchase price in the stock offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the purchase price in the stock offering. Lake Shore Bancorp will accrue compensation expense to reflect the vesting of shares pursuant to such stock-based benefit plans and will credit capital in an amount equal to the charge to operations. Implementation of such plans will require stockholder approval.

 

41

PRO FORMA DATA

The following table summarizes historical data of Lake Shore Federal Bancorp and pro forma data of Lake Shore Bancorp at and for the year ended December 31, 2024. This information is based on assumptions set forth below and in the table and related footnotes, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and stock offering.

The estimated net proceeds disclosed in the table are based upon the following assumptions:

 

(i)

all shares of common stock will be sold in the subscription or community offerings;

 

(ii)

our employee stock ownership plan will purchase 8% of the shares of common stock sold in the stock offering with a loan from Lake Shore Bancorp. The existing loan obligation of our employee stock ownership plan, equal to $1.2 million at December 31, 2024, will be combined with the new loan. The combined loan will be repaid in substantially equal payments of principal and interest (at the prime rate of interest, which will be fixed as of the date of the offering) over 25 years. Interest income that we earn on the loan will offset the interest paid by Lake Shore Bank. The effect on earnings for the employee stock ownership plan is the cost of amortizing the combined loan over 25 years, net of historical expense for the period;

 

(iii)

we will pay Raymond James a fee of 1.35% with respect to shares sold in the subscription and community offerings. No fee will be paid with respect to shares of common stock purchased by our qualified and non-qualified employee stock benefit plans, or stock purchased by our officers, directors and employees, and their immediate families, and no fee will be paid with respect to exchange shares; and

 

(iv)

total expenses of the stock offering, other than the fees and commissions to be paid to Raymond James and any other broker-dealers, will be $1.5 million.

In addition, the expenses of the offering may vary from those estimated, and the fees paid to Raymond James will vary from the amounts estimated if the amount of shares of Lake Shore Bancorp common stock sold varies from the amounts assumed above or if any shares are sold in the syndicated community offering.

We calculated pro forma consolidated net income for the fiscal year as if the estimated net proceeds we received had been invested at the beginning of the year at an assumed interest rate of 4.38% (3.46% on an after-tax basis). This represents the yield on the five-year U.S. Treasury Note at December 31, 2024, which, in light of current market interest rates, we consider to reflect more accurately the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest earning assets and the weighted average rate paid on our deposits, which is the reinvestment rate federal regulations require that we assume in presenting pro forma data.

We further believe that the reinvestment rate is factually supportable because:

 

•

the yield on the U.S. Treasury Note can be determined and/or estimated from third-party sources; and

 

•

we believe that U.S. Treasury securities are not subject to credit losses due to a U.S. Government guarantee of payment of principal and interest.

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. For pro forma earnings per share calculations, we adjusted these figures to give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts as if the shares of common stock were outstanding at the beginning of the year, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.

 

42

The pro forma data gives effect to the implementation of one or more stock-based benefit plans. We have assumed that stock-based benefit plans will acquire for restricted stock awards a number of shares of common stock equal to 4% of the shares of common stock sold in the stock offering at the same price for which they were sold in the stock offering. We have assumed that awards of common stock granted under such plans vest over a five-year period.

We also have assumed that options will be granted under stock-based benefit plans to acquire shares of common stock equal to 10% of the shares of common stock sold in the stock offering. In preparing the table below, we assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $5.32 for each option.

We may grant options and award shares of common stock under one or more stock-based benefit plans in excess of 10% and 4%, respectively, of the shares of common stock sold in the stock offering and that vest sooner than over a five-year period if the stock-based benefit plans are adopted more than one year following the completion of the stock offering.

As discussed under “How We Intend to Use the Proceeds From the Stock Offering,” we intend to contribute 50% of the net proceeds from the stock offering to Lake Shore Bank, and we will retain the remainder of the net proceeds from the stock offering. We will use a portion of the proceeds we retain to fund a loan to the employee stock ownership plan and retain the rest of the proceeds for future use.

The pro forma data does not give effect to:

 

•

withdrawals from deposit accounts to purchase shares of common stock in the stock offering;

 

•

our results of operations after the stock offering; or

 

•

changes in the market price of the shares of common stock after the stock offering.

The following pro forma data may not be representative of the financial effects of the stock offering at the dates on which the stock offering actually occurs, and should not be taken as indicative of future results of operations. Pro forma consolidated stockholders’ equity represents the difference between the stated amounts of our assets and liabilities. The pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Moreover, pro forma stockholders’ equity per share does not give effect to the liquidation accounts to be established in connection with the conversion and stock offering or, in the unlikely event of a liquidation of Lake Shore Bank, to the tax effect of the recapture of the bad debt reserve, if any. See “The Conversion and Stock Offering—Liquidation Rights.”

 

43

		At or for the Year Ended December 31, 2024, Based upon the Sale at $10.00 Per Share of:
		4,250,000 Shares				5,000,000 Shares				5,750,000 Shares				6,612,500 Shares(1)
		(Dollars in thousands, except per share amounts)
Gross proceeds of stock offering		$	42,500			$	50,000			$	57,500			$	66,125
Market value of shares issued in the exchange			24,408				28,716				33,023				37,976
Pro forma market capitalization		$	66,908			$	78,716			$	90,523			$	104,101
Gross proceeds of offering		$	42,500			$	50,000			$	57,500			$	66,125
Estimated expenses			(2,130	)			(2,224	)			(2,317	)			(2,424	)
Estimated net proceeds			40,370				47,777				55,183				63,701
Assets received from Lake Shore, MHC
Common stock purchased by employee stock ownership plan			(3,400	)			(4,000	)			(4,600	)			(5,290	)
Common stock purchased by stock-based benefit plans			(1,700	)			(2,000	)			(2,300	)			(2,645	)
Estimated net proceeds, as adjusted		$	35,270			$	41,777			$	48,283			$	55,766
For the Year Ended December 31, 2024
Consolidated net earnings:
Historical		$	4,931			$	4,931			$	4,931			$	4,931
Income on adjusted net proceeds			1,220				1,446				1,671				1,930
Income on MHC asset contribution			8				8				8				8
Employee stock ownership plan (2)			(61	)			(86	)			(111	)			(132	)
Stock awards (3)			(269	)			(316	)			(363	)			(418	)
Stock options (4)			(428	)			(504	)			(580	)			(667	)
Pro forma net income		$	5,401			$	5,479			$	5,556			$	5,652
Earnings per share (5):
Historical		$	0.79			$	0.66			$	0.58			$	0.50
Income on adjusted net proceeds			0.19				0.20				0.20				0.20
Employee stock ownership plan (2)			(0.01	)			(0.01	)			(0.01	)			(0.01	)
Stock awards (3)			(0.04	)			(0.04	)			(0.04	)			(0.04	)
Stock options (4)			(0.07	)			(0.07	)			(0.07	)			(0.07	)
Pro forma earnings per share (5)		$	0.86			$	0.74			$	0.66			$	0.58
Offering price to pro forma net earnings per share			11.63x				13.51x				15.15x				17.24x
Shares used in earnings per share calculations			6,266,955				7,372,888				8,478,821				9,770,426
At December 31, 2024
Stockholders’ equity:
Historical		$	89,868			$	89,868			$	89,868			$	89,868
Estimated net proceeds			40,370				47,777				55,183				63,701
Equity increase from Lake Shore, MHC			230				230				230				230
Common stock acquired by employee stock ownership plan (2)			(3,400	)			(4,000	)			(4,600	)			(5,290	)
Common stock acquired by stock-based benefit plans (3)			(1,700	)			(2,000	)			(2,300	)			(2,645	)
Pro forma stockholders’ equity (6)		$	125,368			$	131,875			$	138,381			$	145,864
Intangible assets		$	—			$	—			$	—			$	—
Pro forma tangible stockholders’ equity (6)		$	125,368			$	131,875			$	138,381			$	145,864
Stockholders’ equity per share (7):
Historical		$	13.44			$	11.41			$	9.92			$	8.63
Estimated net proceeds			6.03				6.07				6.10				6.12
Equity increase from Lake Shore, MHC			0.03				0.03				0.03				0.02
Common stock acquired by employee stock ownership plan (2)			(0.51	)			(0.51	)			(0.51	)			(0.51	)
Common stock acquired by stock-based benefit plans (3)			(0.25	)			(0.25	)			(0.25	)			(0.25	)
Pro forma stockholders’ equity per share (7)		$	18.74			$	16.75			$	15.29			$	14.01
Intangible assets		$	—			$	—			$	—			$	—
Pro forma tangible stockholders’ equity per share (7)		$	18.74			$	16.75			$	15.29			$	14.01
Offering price as percentage of pro forma stockholders’ equity per share			53.36	%			59.70	%			65.40	%			71.38	%
Offering price as percentage of pro forma tangible stockholders’ equity per share			53.36	%			59.70	%			65.40	%			71.38	%
Shares outstanding for pro forma equity per share calculations			6,690,823				7,871,557				9,052,290				10,410,135

(footnotes begin on following page)

 

44

(1)	As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

(2)

Assumes that 8% of the shares of common stock sold in the stock offering will be purchased by the employee stock ownership plan. For purposes of these tables, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from Lake Shore Bancorp, and the outstanding loan with respect to existing shares of Lake Shore Federal Bancorp held by the employee stock ownership plan will be refinanced and consolidated with the new loan. Lake Shore Savings Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Lake Shore Savings Bank’s total annual payments on the employee stock ownership plan debt are based upon 25 equal annual installments of principal and interest. Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 718-40, “Compensation—Stock Compensation—Employee Stock Ownership Plans” (“ASC 718-40”) requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Lake Shore Savings Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 21%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 17,661, 20,778, 23,895, and 26,655 shares were committed to be released during the year ended December 31, 2024 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, and in accordance with ASC 718-40, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for net income per share calculations.

(3)

Assumes that one or more stock-based benefit plans purchase an aggregate number of shares of common stock equal to 4% of the shares to be sold in the stock offering. Stockholder approval of the plans and purchases by the plans may not occur earlier than six months after the completion of the conversion and stock offering. The shares may be acquired directly from Lake Shore Bancorp or through open market purchases. Shares in the stock-based benefit plan are assumed to vest over a period of five years. The funds to be used to purchase the shares will be provided by Lake Shore Bancorp. The tables assume that (i) the stock-based benefit plan acquires the shares through open market purchases at $10.00 per share, (ii) 20% of the amount contributed to the plan is amortized as an expense during the year ended December 31, 2024, and (iii) the plan expense reflects an effective combined federal and state tax rate of 21%. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock (equal to 4% of the shares sold in the stock offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 2.48%.

(4)

Assumes that options are granted under one or more stock-based benefit plans to acquire an aggregate number of shares of common stock equal to 10% of the shares to be sold in the stock offering. Stockholder approval of the plans may not occur earlier than six months after the completion of the conversion and stock offering. In calculating the pro forma effect of the stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $5.32 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options, and that 25% of the amortization expense (the assumed portion related to options granted to directors) resulted in a tax benefit using an effective combined federal and state tax rate of 21%. The actual expense will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used and the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares used to satisfy the exercise of options comes from authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. The issuance of authorized but unissued shares of common stock pursuant to the exercise of options under such plan would dilute stockholders’ ownership and voting interests by approximately 5.97%.

(5)

Per share figures include publicly held shares of Lake Shore Federal Bancorp common stock that will be issued in exchange for shares of Lake Shore Bancorp common stock. See “The Conversion and Stock Offering—Share Exchange Ratio for Current Stockholders.” Net income per share computations are determined by taking the number of shares assumed to be sold in the stock offering and the number of new shares assumed to be issued in exchange for publicly held shares and, in accordance with ASC 718-40, subtracting the employee stock ownership plan shares that have not been committed for release during the period. See footnote 2, above. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts.

(6)	The retained earnings of Lake Shore Savings Bank will be substantially restricted after the conversion and stock offering. See “Our Dividend Policy,” “The Conversion and Stock Offering—Liquidation Rights” and “Supervision and Regulation—Federal Banking Regulation—Capital Distributions.”

(7)

Per share figures include publicly held shares of Lake Shore Federal Bancorp common stock that will be issued in exchange for shares of Lake Shore Bancorp common stock. Stockholders’ equity per share calculations are based upon the sum of (i) the number of shares assumed to be sold in the stock offering and (ii) shares to be issued in exchange for publicly held shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. The exchange shares reflect an exchange ratio of 1.1632, 1.3685, 1.5738 and 1.8098 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. The number of shares actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information at December 31, 2024 and 2023 and for the years ended December 31, 2024 and 2023 is derived in part from the audited consolidated financial statements that appear elsewhere in this prospectus. You should read the information in this section in conjunction with the other business and financial information contained in this prospectus, including the consolidated financial statements and related notes of Lake Shore Federal Bancorp appearing elsewhere in this prospectus.

Overview

Our results of operations depend primarily on our net interest income, which is the difference between the interest income we earn on loans and investments and the interest expense we pay on deposits, borrowings and other interest-bearing liabilities. Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates we earn or pay on these balances.

Our operations are also affected by non-interest income, such as service charges and fees, debit card fees, earnings on bank owned life insurance, gains and losses on interest rate swaps and the sales of securities and loans, our provision for credit losses and non-interest expenses which include salaries and employee benefits, occupancy and equipment costs, data processing, professional services, advertising and other general and administrative expenses.

Financial institutions like us, in general, are significantly affected by economic conditions, competition, and the monetary and fiscal policies of the federal government. Lending activities are influenced by the demand for and supply of housing and commercial real estate, competition among lenders, interest rate conditions, and funds availability. Our operations and lending are principally concentrated in the Western New York area, and our operations and earnings are influenced by local economic conditions. Deposit balances and cost of funds are influenced by prevailing market rates on competing investments, customer preferences, and levels of personal income and savings in our primary market area. Operations are also significantly impacted by government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies, as well as regulatory actions, may materially impact our financial performance.

Business Strategy

In April 2023, Kim C. Liddell was appointed President and Chief Executive Officer of Lake Shore Savings Bank and its holding companies, Lake Shore Federal Bancorp and Lake Shore, MHC, in order to lead a new management team to both expeditiously resolve the Consent Order which Lake Shore Savings Bank entered into with the OCC in February 2023, as well as position the bank for future market opportunities. The Consent Order required Lake Shore Savings Bank to correct certain deficiencies relating to information technology, security, automated clearing house program, audit, management and BSA/AML. In addition, Lake Shore Federal Bancorp and Lake Shore, MHC entered into a written agreement with the Federal Reserve Bank of Philadelphia in June 2023 to support the remediation activities at Lake Shore Savings Bank. As a result of the new management team’s efforts, the Consent Order was terminated by the OCC on December 3, 2024 followed by the termination of the written agreement with the Federal Reserve Bank of Philadelphia on March 4, 2025. With the resolution of the Consent Order and the written agreement, management can focus on its core strategy of positioning the bank as a leading community bank, locally headquartered in Western New York, with more than 133 years of service to our community. We strive to accomplish our goals by continuing to emphasize our exceptional individualized customer service and financial strength, continued community involvement, strong capital levels, multi-channel banking services and penetration in our market areas via organic growth of loans and deposits. Highlights of our current business strategy include the following:

Provide high-quality, personalized service as a leading community bank to our local and loyal customers. We currently operate ten full-service branch offices throughout Western New York, where our branch teams initiate and develop both consumer and commercial customer relationships in and around the surrounding

 

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market areas. We offer concierge banking services, together with our online and mobile customer conveniences, creating an individualized approach for customers to manage their finances whenever, wherever and however they wish. As a true local bank, we pride ourselves on offering competitive products delivered with the individualized service our customers have come to expect. Our experienced team of commercial bankers can meet the needs of businesses through a variety of checking and credit products, and banking services. The retail banking team located in our branch offices focuses on meeting the deposit and lending needs of consumer customers throughout various life stages as well as small business customers. From local decision-making, responding quickly and efficiently to customer needs, and utilizing technology to level the playing field with our competitors, we are committed to developing long-term relationships with our customers. Staying true to our local roots and mission of “Putting People First” continues to uniquely position us as a bank of choice in Western New York.

Grow our loan portfolio with an emphasis on commercial lending while maintaining our historical residential mortgage program. We have been strategically focused on increasing the originations of commercial real estate loans to finance the purchase of real property, which generally consists of developed real estate, particularly due to the interest rate risk inherent in holding long-term, fixed rate, residential, one- to four-family real estate loans in our portfolio. We have also focused on commercial business lending to small businesses, including business installment loans, lines of credit and other commercial loans. These types of commercial loans are generally made at higher interest rates and for shorter terms than one- to four-family real estate loans, which mitigates interest rate risk. At December 31, 2024 and 2023, our commercial real estate loan portfolio (including loans to finance the construction of commercial real estate) represented the largest holdings in our loan portfolio at 58.7% and 56.8%, respectively, of total gross loans. At December 31, 2024, our commercial real estate portfolio as a percentage of Lake Shore Savings Bank’s total capital as defined under the federal interagency guidance was 239%. The additional capital raised in the offering and termination of the Consent Order will allow us to further increase our commercial lending capacity by enabling us to originate more loans and expand our relationships with our current commercial customers and assist us to continue to attract new customers. In addition, following the offering, we would consider establishing loan production offices to grow lending teams in our core markets or evaluating opportunities in new markets depending on the acquisition of specific lenders with strong ties to their local communities.

At December 31, 2024 and 2023, residential one- to four-family mortgage loans (including loans to finance the construction of one- to four-family homes) represented the second largest holding in our loan portfolio at 29.5% and 30.8%, respectively, of total gross loans. Residential mortgage lending has historically been a significant part of our business, and we recognize that continuing to originate residential one- to four-family mortgage loans is essential to our status as a community-oriented bank. We may sell long-term conforming fixed rate one- to four-family residential loans that we originate on the secondary market, as part of our interest rate and liquidity 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. We did not sell any one- to four- family residential loans in the secondary market during the years ended December 31, 2024 or 2023.

Manage credit risk to maintain a low level of non-performing assets. We remain committed to maintaining prudent underwriting standards and aggressively monitoring our loan portfolio to maintain asset quality. We have established an experienced commercial credit and lending team and we have implemented well-defined policies, a thorough and efficient loan underwriting process, and active credit monitoring. Furthermore, management and our board of directors review robust loan portfolio analytics on a monthly basis to identify trends that could represent heightened credit risk for the organization. As a result of our continued focus on credit risk management, we had non-performing assets of $3.8 million, or 0.55% of total assets, at December 31, 2024. Our goal is to continue to improve our asset quality through prudent underwriting standards and the diligence of our loan collection personnel.

Increase our share of lower-cost core deposit growth. As a community-based bank, we are focused on growing core deposits within our local communities. As interest rates increased in recent years, customers migrated to higher cost certificates of deposit and we have made a concerted effort in recent periods to begin to reduce our reliance on higher cost certificates of deposit in favor of obtaining lower cost retail and commercial deposit accounts. We also continue to enhance our technology-based deposit products such as remote deposit capture, commercial cash management and mobile deposits in order to accommodate business customers. Our core deposits (which is defined as our deposits other than certificates of deposit with a balance greater than $250,000 and brokered

 

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certificates of deposit), represented 94.1% of total deposits at December 31, 2024. Following our conversion to a New York-chartered commercial bank, we will be able to attract and accept municipal deposits which we believe can further enhance core deposits. We intend to continue our focus on core deposit growth by offering our retail and commercial customers a full selection of deposit-related services, and making further investments in technology so that we can enhance our value proposition and deliver high-quality, innovative products and services to our customers.

Pursue opportunistic mergers and acquisitions. In addition to organic growth, we intend to pursue opportunities to acquire banks that offer opportunities for strong financial returns. We recognize the importance of scale and technological innovation in banking. Our primary focus will be on franchises that have strong core deposit and lending relationships, new product capabilities and contiguous market footprints, while maintaining an acceptable risk profile. In addition, we believe that the accelerated rate of consolidation in the banking industry will continue over the next several years such that the capital we are raising in the offering will enhance our ability to make acquisitions of other financial institutions. However, we currently have no understandings or agreements with respect to acquiring any specific financial institution.

Utilize technology to adapt to evolving customer needs. As the banking industry continues to rapidly evolve in terms of technological conveniences, we remain proactive in our efforts to provide e-banking services that our customers expect. We are committed to making investments in technology to make our organization more efficient and to meet customer needs. To this end, we have enhanced the security, monitoring, and updating of our customer systems via the deployment of a cloud-based computing system, in addition to the supporting hardware and software. During 2025, we continue to leverage the use of our core banking system to efficiently serve our customers and provide them with cutting-edge banking services for their convenience.

Leverage management expertise. We intend to rely on management’s extensive experience to execute our business strategy. Our new management team, led by Mr. Liddell, has a track record of profitably growing financial institutions, creating value and providing liquidity for stockholders. With the enhancements to our management team over the last two years, we have positioned ourselves to capitalize on market opportunities and enhance our profitability.

Attract and retain key talent. Key to our strategy is our ability to attract and retain exceptional talent. As a community-based bank, we are focused on recruiting experienced lenders with knowledge of our markets who have either been displaced or are dissatisfied due to consolidation. We will seek to attract lenders with local relationships that can have a near-term impact on growing our loan portfolio.

Summary of Critical Accounting Policies and Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP. As a result, we are required to make certain estimates, judgments, and assumptions that we believe are reasonable based upon the information available at that time. Critical accounting estimates include the areas where we have made what we consider to be particularly difficult, subjective, or complex judgments concerning estimates, and where these estimates can significantly affect our financial results under different assumptions and conditions. These estimates, judgments, and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the years presented. Actual results could be different from these estimates. We evaluate our critical accounting estimates and assumptions on an ongoing basis and update them as needed. Significant accounting policies are presented in Note 2—Summary of Significant Accounting Policies, to the Audited Consolidated Financial Statements included within this Prospectus.

Allowance for Credit Losses

Management considers the allowance for credit losses to be a critical accounting estimate, given the uncertainty in estimating lifetime credit losses attributable to our portfolios of assets exhibiting credit risk, particularly in our loan portfolio, and the material effect that such judgments can have on our results of operations. Determining the amount requires significant judgment on the part of management, is multi-faceted, and can be imprecise. The level of the allowance for credit losses on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions, and expectations of the future based on reasonable and supportable forecasts.

 

 

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The allowance is established through a provision for credit losses in the Consolidated Statements of Income, and evaluation of the adequacy of the allowance for credit losses is performed by management on a quarterly basis. While management uses available information to anticipate credit losses, future additions to the allowance may be necessary based on changes in economic conditions or the composition of our portfolios. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for credit losses. As of December 31, 2024 and December 31, 2023, the allowance for credit losses on loans totaled $5.1 million and $6.5 million, respectively. Due to the nature and composition of our lending activities, a significant portion of the allowance for credit losses on loans is allocated to the commercial real estate portfolio. As of December 31, 2024 and December 31, 2023, the allowance for credit losses on loans allocated to the total commercial real estate portfolio was $4.2 million, or 81.3%, and $5.2 million, or 81.0%, respectively.

Our methodology for maintaining our allowance for credit losses is based on historical experience and data, current economic information, and reasonable and supportable forecasts. Accordingly, the estimation of the allowance for credit losses is impacted by the economic forecasts utilized, which require the use of significant judgment. Deterioration in forecasted economic conditions may lead to further required increases to the allowance for credit losses. Conversely, improvements in forecasted economic conditions may warrant further reductions to the allowance for credit losses. In estimating the allowance for credit losses, management considers the sensitivity of the model and significant judgments and assumptions that could result in an amount that is materially different from management’s estimate.

The allowance for credit losses is sensitive to various forecasted macroeconomic drivers, including the Federal Open Market Committee’s (“FOMC”) median forecasted U.S. civilian unemployment rate and the year-over-year change in U.S. Gross Domestic Product (“GDP”). While it is difficult to estimate how potential changes to various factors may impact the allowance for credit losses because such changes to factors may not occur at the same rate or in the same direction, management compared the modeled allowance for credit losses on loans to a hypothetical model using a downside economic forecast. Using an immediate “shock” or increase of 20 basis points in the FOMC’s projected rate of U.S. civilian unemployment, and a decrease of 100 basis points in the FOMC’s projected rate of U.S. GDP growth, this would increase the model’s total calculated allowance for credit losses on loans by $507,000, or 9.9%, representing a ten basis points increase to the coverage ratio of the allowance for credit losses as a percentage of loans at amortized cost, assuming all other quantitative and qualitative factors are kept at current levels, as of December 31, 2024. This example is only one of the numerous possible economic scenarios that could be utilized in assessing the sensitivity of the allowance for credit losses and does not represent management’s assumptions or judgment of factors as of December 31, 2024.

Unexpected changes in economic growth could adversely affect our results of operations, including causing increases in delinquencies and default rates on loans, which would adversely impact our charge-offs, allowance for credit losses, and provision for credit losses. Deterioration in real estate values, employment data and household incomes may also result in higher credit losses for us. Also, in the ordinary course of business, we may be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our business, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities and industries, may not function as we have anticipated.

Analysis of Net Interest Income

Net interest income represents the difference between the interest we earn on our interest-earning assets, such as commercial and residential mortgage loans and investment securities, and the expense we pay on interest-bearing liabilities, such as deposits and borrowings. Net interest income depends on both the volume of our interest-earning assets and interest-bearing liabilities and the interest rates we earn or pay on them.

 

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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 years 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 years presented. Average balances are derived from daily balances over the years indicated. The average balances for loans are net of allowance for credit losses, but include non-accrual loans. The loan yields include net amortization of certain deferred fees and costs that are considered adjustments to yields. The net amortization of deferred loan fees and costs were $496,000 and $552,000 for the years ended December 31, 2024 and 2023, respectively. Interest income on securities does not include a tax equivalent adjustment for bank qualified municipal bonds.

 

		For the Year Ended
		December 31, 2024												December 31, 2023
		Average Balance				Interest Income/ Expense				Yield/Rate				Average Balance				Interest Income/ Expense				Yield/Rate
		(Dollars in thousands)
Interest-earning assets:
Interest-earning deposits & federal funds sold		$	48,639			$	2,460				5.06	%		$	36,948			$	1,805				4.89	%
Securities(1)			60,347				1,631				2.70	%			67,840				1,941				2.86	%
Loans, including fees			547,525				30,713				5.61	%			567,319				30,009				5.29	%
Total interest-earning assets			656,511				34,804				5.30	%			672,107				33,755				5.02	%
Other assets			49,629												46,057
Total assets		$	706,140											$	718,164
Interest-bearing liabilities:
Demand & NOW accounts		$	67,023			$	64				0.10	%		$	76,495			$	75				0.10	%
Money market accounts			144,926				3,811				2.63	%			132,816				1,914				1.44	%
Savings accounts			59,095				40				0.07	%			70,600				47				0.07	%
Time deposits			220,856				9,162				4.15	%			206,218				6,033				2.93	%
Borrowed funds & other interest-bearing liabilities			21,465				664				3.09	%			38,701				1,328				3.43	%
Total interest-bearing liabilities			513,365				13,741				2.68	%			524,830				9,397				1.79	%
Other non-interest-bearing liabilities			105,018												109,907
Stockholders’ equity			87,757												83,427
Total liabilities & stockholders’ equity		$	706,140											$	718,164
Net interest income						$	21,063											$	24,358
Interest rate spread											2.62	%											3.23	%
Net interest margin											3.21	%											3.62	%

 

(1)	The tax equivalent adjustment for bank qualified tax exempt municipal securities, using a federal statutory rate of 21%, results in rates of 3.08% and 3.27% for the years ended December 31, 2024 and 2023, respectively.

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 later year to the volume change between the two years. The effect of changes in rate is measured by applying the change in rate between the two years to the average volume during the first year.

 

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