S-1/A: Lake Shore Bancorp Converts to Full Stock, Raises Capital

Lake Shore Bancorp, Inc. is converting to a fully public stock holding company, offering up to 6.6 million shares at $10.00 each to strengthen capital and support strategic growth.

Summary

• Lake Shore Bancorp, Inc. (new Maryland corporation) is undertaking a second-step conversion from a two-tier mutual holding company structure to a fully public stock holding company structure.
• The offering involves selling between 4,250,000 and 5,750,000 shares of common stock, with a potential increase to 6,612,500 shares, at a price of $10.00 per share.
• Gross offering proceeds are estimated to range from $42.5 million to $57.5 million, potentially reaching $66.125 million at the adjusted maximum.
• Net proceeds, after estimated expenses, are projected to be between $40.4 million and $55.2 million, or up to $63.7 million at the adjusted maximum.
• Existing public stockholders of Lake Shore Federal Bancorp will exchange their shares for new Lake Shore Bancorp shares at an exchange ratio ranging from 1.1632 to 1.5738 (up to 1.8098 at adjusted maximum).
• Lake Shore Savings Bank will convert its charter to a New York-chartered commercial bank and be renamed Lake Shore Bank.
• The conversion and stock offering are subject to approval by Lake Shore Federal Bancorp stockholders (two-thirds of total votes, and a majority of public stockholder votes) and Lake Shore, MHC members (majority of eligible votes).
• The OCC Consent Order (February 2023) was terminated on December 3, 2024, and the Federal Reserve Bank written agreement (June 2023) was terminated on March 4, 2025.
• The company's core strategy focuses on personalized community banking, growing commercial lending, managing credit risk, increasing lower-cost core deposits, pursuing opportunistic M&A, utilizing technology, leveraging management expertise, and attracting key talent.

Sentiment

Score: 6

Explanation: The filing presents a positive outlook due to the resolution of regulatory issues and a clear strategic plan for growth, supported by a significant capital raise. However, the expected low return on equity post-offering and the inherent risks of the banking industry temper the overall sentiment.

Positives

• The resolution of the OCC Consent Order and Federal Reserve written agreement removes significant regulatory burdens, allowing management to focus on growth.
• The new management team, led by Kim C. Liddell, is credited with resolving the regulatory issues and is positioned to capitalize on market opportunities.
• The company maintains a low level of non-performing assets, at 0.55% of total assets at December 31, 2024, and further decreased to 0.50% at March 31, 2025.
• Core deposits represented a strong 94.1% of total deposits at December 31, 2024, indicating a stable funding base.
• Post-conversion, Lake Shore Bank will be able to attract and accept municipal deposits, which is expected to enhance core deposit growth.
• Net interest income for Q1 2025 increased by $332,000, or 6.5%, to $5.5 million compared to Q1 2024, with net interest margin improving to 3.49% from 3.10%.
• The company's capital levels are strong, with Lake Shore Savings Bank exceeding all regulatory capital requirements and being considered well-capitalized (CBLR of 13.83% at Dec 31, 2024).

Negatives

• Total assets decreased by $39.6 million (5.5%) from $725.1 million at December 31, 2023, to $685.5 million at December 31, 2024.
• Cash and cash equivalents decreased by $20.6 million (38.3%) in 2024, primarily due to debt repayment and non-renewal of brokered CDs.
• Net loans receivable decreased by $11.2 million (2.0%) in 2024, mainly due to decreases in residential one-to-four-family and home equity loans.
• Non-performing assets increased by $423,000 (12.5%) to $3.8 million at December 31, 2024, compared to $3.4 million at December 31, 2023.
• Cash dividends were suspended on March 11, 2025, pending the completion of the conversion and stock offering.
• The company expects its return on equity to be low following the stock offering due to the relatively high capital level, which could negatively affect the trading price of shares.

Risks

• Substantial commercial real estate and commercial business loans involve greater credit risk than residential loans, with potential for significant losses if economic conditions deteriorate.
• A downturn in the local real estate market in Erie and Chautauqua Counties could significantly impair collateral values and increase non-performing loans.
• Dependence on executive officers and key personnel means the loss of their services could adversely affect business strategy implementation.
• Operational risks, including reliance on technology, cybersecurity breaches, and third-party vendor failures, could lead to financial losses or reputational damage.
• Changes in interest rates could adversely affect net interest income and financial condition, as liabilities may re-price faster than long-term, fixed-rate assets.
• High inflation levels could negatively impact business by decreasing the value of the securities portfolio and increasing non-interest expenses.
• Regulatory compliance costs and potential changes in laws and regulations may adversely affect operations and increase expenses.
• The company may need to raise additional capital in the future, which may not be available on acceptable terms, potentially impairing growth.
• The Federal Reserve Board may require the company to commit capital resources to support Lake Shore Savings Bank, potentially straining resources.
• The future price of common stock may be less than the $10.00 purchase price per share, as initial trading prices for newly converted institutions often trade below the offering price.
• Broad discretion in using the proceeds of the stock offering means failure to effectively deploy funds could adversely affect financial performance.
• Stock-based benefit plans will increase expenses and dilute ownership interest for existing stockholders.
• Anti-takeover provisions in the articles of incorporation and bylaws could make takeover attempts more difficult, potentially limiting stockholder opportunities for a premium.
• There may be a limited trading market in the common stock, hindering liquidity and potentially lowering the market price.

Future Outlook

Management intends to resume paying cash dividends on common stock after the offering, subject to capital requirements and financial performance. The company plans to increase commercial lending capacity, potentially establish loan production offices, and evaluate new markets. Opportunistic mergers and acquisitions are a strategic focus, leveraging the increased capital from the offering. Continued investments in technology are planned to enhance efficiency and meet evolving customer needs, including leveraging the core banking system in 2025.

Management Comments

• Kim C. Liddell was appointed President and Chief Executive Officer in April 2023 to lead a new management team to expeditiously resolve the Consent Order and position the bank for future market opportunities.
• 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.
• Our new management team, led by Mr. Liddell, has a track record of profitably growing financial institutions, creating value and providing liquidity for stockholders.

Industry Context

The banking industry is experiencing an accelerated rate of consolidation, which the company aims to capitalize on through enhanced M&A capabilities post-conversion. Competition is intense from commercial banks, credit unions, online banks, and fintech companies, requiring continuous technological adaptation. The local Western New York market, including Erie and Chautauqua Counties, shows strong economic expansion, particularly in healthcare, education, and new business development, which Lake Shore Bank intends to leverage for growth.

Comparison to Industry Standards

• Pro forma pricing ratios at the midpoint of the offering range indicated a discount of 29.8% on a price-to-book value basis compared to the peer group average.
• Pro forma pricing ratios at the midpoint of the offering range indicated a discount of 32.1% on a price-to-tangible book value basis compared to the peer group average.
• Pro forma pricing ratios at the midpoint of the offering range indicated a discount of 25.1% on a price-to-earnings basis compared to the peer group average.
• The peer group consisted of 10 publicly traded savings and loan and bank holding companies with assets between $425 million and $1.75 billion (Mid-Atlantic/New England) or at least $1.75 billion (Midwest/Southeast/Southwest), tangible equity-to-assets ratios greater than 7.50%, and positive reported/core earnings.
• Lake Shore Bancorp's pro forma valuation included slight downward adjustments for profitability, growth, viability of earnings, and primary market area due to a less favorable efficiency ratio and lower pro forma core earnings relative to peers, and less favorable demographic growth characteristics.
• A slight upward adjustment was made for financial condition due to Lake Shore Bancorp's stronger pro forma capital position and more favorable funding composition relative to the comparable peer group measures.

Management Changes

Corporate Governance

Legal Proceedings

• Lake Shore Savings Bank consented to and subsequently terminated a Consent Order with the Office of the Comptroller of the Currency (OCC) on December 3, 2024, addressing deficiencies in IT, security, ACH program, audit, management, and BSA/AML.
• Lake Shore Federal Bancorp and Lake Shore, MHC entered into and subsequently terminated a written agreement with the Federal Reserve Bank of Philadelphia on March 4, 2025, to support remediation activities at Lake Shore Savings Bank.
• No other material pending legal proceedings are currently party to the company that would have a material adverse effect on financial condition, results of operations, or cash flows.

Related Party Transactions

• Loans to directors and executive officers were made in the ordinary course of business, on substantially the same terms as comparable loans with non-related persons, and did not involve more than normal risk of collectability, in compliance with federal banking regulations.
• The board of directors has a written policy requiring majority disinterested director approval for extensions of credit to insiders exceeding certain thresholds ($25,000 or 5% of unimpaired capital and surplus, or $500,000 aggregate).

Stakeholder Impact

• Shareholders: Will experience dilution from the issuance of new shares, but may benefit from increased stock liquidity, potential for future cash dividends, and enhanced M&A flexibility. Anti-takeover provisions may limit opportunities for premium acquisition offers.
• Depositors: Will retain existing deposit balances, interest rates, and FDIC insurance. They will lose voting rights in Lake Shore, MHC but will receive an interest in liquidation accounts to preserve their liquidation rights.
• Employees: Will continue to participate in the Employee Stock Ownership Plan (ESOP) and may benefit from new stock-based benefit plans and retention agreements for key executives.
• Customers: Expected to continue receiving high-quality, personalized service, with potential enhancements to technology-based products and services, and expanded lending capacity.
• Creditors: The capital raise will strengthen the company's regulatory capital position, providing a stronger financial buffer.

Next Steps

• Special meetings of Lake Shore, MHC members and Lake Shore Federal Bancorp stockholders to approve the plan of conversion.
• Completion of the conversion and stock offering, including the issuance of new common stock and exchange of existing shares.
• Listing of Lake Shore Bancorp common stock on the Nasdaq Global Market under the symbol LSBK.
• Resumption of cash dividends on common stock, with the amount to be determined by the board of directors.
• Implementation of one or more new stock-based benefit plans, subject to stockholder approval, no earlier than six months post-conversion.
• Potential establishment of loan production offices and evaluation of new markets to grow lending teams.
• Pursuit of opportunistic mergers and acquisitions of other financial institutions or financial services companies.

Key Dates

Recommendation

The conversion to a fully public stock holding company and the associated capital raise are strategically positive steps, resolving past regulatory issues and providing a stronger foundation for growth, particularly in commercial lending and potential M&A. The improved Q1 2025 financial performance (net interest income, NIM) is encouraging. However, the expected low return on equity post-offering, the inherent dilution for existing shareholders, and the general risks associated with the banking sector and local economic conditions suggest a 'hold' recommendation. Investors should monitor the effective deployment of capital, the realization of growth strategies, and the actual trading performance of the new entity's stock.

Keywords

Mutual-to-stock conversion, Stock offering, Community bank, Commercial real estate loans, Deposit growth, Regulatory capital, SEC filing, Financial services, Western New York, LSBK