Federal regulators lift last restrictions from Lake Shore Savings Bank

Lake Shore Bancorp is out from under the microscope of federal regulators.

Three months after the federal agency that regulates its primary subsidiary, Lake Shore Savings Bank, released it from a consent order that had restricted its business for two years, the Federal Reserve Board on Thursday terminated its own enforcement action against the parent company and the mutual holding company that owns both.

That's a big relief for the Dunkirk-based bank, which had been penalized for "unsafe and unsound business practices" and was ordered to fix shortcomings in information technology security, risk governance, management oversight and anti-money-laundering efforts.

It was labeled as being in "troubled condition" because of inadequate capabilities, processes and practices. But it was not found to have issues with its actual financial position.

It's also a vindication for the bank's relatively new CEO, Kim Liddell, who was brought in just two months after the restrictions were imposed, and who immediately made compliance his top priority so he could get the restrictions removed.

Lake Shore Savings

Kim Liddell was brought in to right the ship as president and CEO at Lake Shore Savings Bank after the Dunkirk-based financial institution was slapped with a consent decree by federal regulators in February 2023.

The bank had already hired its first chief operating officer and chief technology officer, and Liddell continued shuffling executives to strengthen management, governance and oversight.

The Fed move also removes a potential barrier to its new plan to convert from a depositor-owned "mutual" savings bank to a fully publicly traded commercial bank, by selling stock in the rest of the company to investors.

The goal is to enable the company to raise significantly more capital while expanding its lending capacity, giving it new opportunities to grow - including by banking with municipalities and public entities in the state.

Currently, Lake Shore MHC, a mutual holding company that was created almost 20 years ago, owns 63% of shares in Lake Shore Bancorp, which owns the bank. That was done as an intermediate step when the savings bank decided in 2006 to form a holding company and sell some stock but wanted to maintain local control and ownership. With this second-step conversion, that top level would be eliminated.

But those moves – along with its plans to switch to a state charter from a federal charter – would have been hindered by the regulatory restrictions, because the conversion requires the approval from regulators, as well as shareholders and depositors.

The end of the Fed's written agreement from June 28, 2023, coupled with the lifting of the May 2023 consent order by the Office of the Comptroller of the Currency in December, means the companies are not required to ask for permission from regulators in advance before declaring or paying dividends, buying back stock, issuing shares, paying interest in on subordinated debt or taking on additional debt.

They are also not required to consult with regulators before appointing new directors or senior executives or changing responsibilities of top executives, nor are they restricted from paying severance.

Those directives were put in place in the wake of a "data security incident" in November 2021, in which employees were unable to get into internal systems and data for a limited period of time. According to a document filed with the Securities and Exchange Commission, an investigation later found “unauthorized access to certain data,” but no impact on the bank’s core systems and “no evidence that customer personal information was misused."

That led initially to a formal written agreement in 2022 with the OCC, an agency under the U.S. Treasury Department. But the OCC instituted a stricter consent order a year later after finding the bank in "substantial noncompliance" with the written agreement.

Lake Shore has six branches in Erie County and four branches in Chautauqua County.

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