LSBK Lake Shore Bancorp Inc

COMPENSATION OF DIRECTORS

Director Compensation

Meeting Fees.    We pay a fee to each of the non-employee directors for attendance at Board of Directors meetings.  On each meeting date, the board members are required to attend a board meeting for Lake Shore Savings Bank, as well as Lake Shore Bancorp, Inc. and Lake Shore, MHC, if there are agenda items up for discussion.  Only one meeting fee is paid for attendance at the three board meetings on the meeting date.   The director meeting fee is $1,650 for Board meetings attended in person or remotely.    The annual retainer for the Chairman of the Board of Directors was $32,500.  The Chairperson of each board committee received an annual retainer of $6,000, with the exception of the Audit,  Risk and Chairman’s Compliance Committee Chairpersons, who received an annual retainer of $10,000.  The annual retainer for committee members of the Compensation, Asset Liability, Loan and Nominating and Corporate Governance Committees was $3,000.  The annual retainer for committee members of the Audit, Risk and Chairman’s Compliance Committees was $5,000.  Members of the Board of Directors who are also employees do not receive director fees.  The Chairman of the Board does not earn fees for his service on Board committees, except for his service as Chairman of the Chairman’s Compliance committee, where he does receive an annual retainer of $10,000.

Supplemental Benefit Plans for Non-Employee Directors.    Lake Shore Savings entered into a supplemental benefit plan in 1999 (the “1999 Plan”) with each of its then non-employee directors.  Under the 1999 Plan, each participant is guaranteed monthly payments over a period of fifteen years commencing at age 70 equal to $18,105 per year based upon 21 years of service as a director to Lake Shore Savings (or an earlier retirement age if 21 years of service is attained prior to age 70) with the annual benefit payable reduced proportionately for each year of service as a director less than 21 years attained at age 70.    

Lake Shore Savings entered into a supplemental benefit plan in 2001 with each of its then non-employee directors.  This plan,  as amended, provides a benefit formula equal to a percentage of the participant’s average pay, which is multiplied by number of years of service, not to exceed 20 years of service or 40% of average pay.  The payment is guaranteed over a period of fifteen years beginning the month following termination of service or age 72, whichever comes first.  This

plan includes each of the current non-employee directors, with the exception of Ms. DeBergalis, Mr. McGrath,  and Mr. Passafaro.  During 2022, Mr. Bennett received $3,323 under this supplemental benefit plan for non-employee directors.      

Equity Plans.    Our directors are eligible to participate in the Lake Shore Bancorp, Inc. 2006 Stock Option Plan and the Lake Shore Bancorp, Inc. 2012 Equity Incentive Plan (the “Equity Incentive Plans”). These benefit plans are discussed under the “Executive Officer Compensation—2006 Stock Option Plan” and “Executive Officer Compensation - 2012 Equity Incentive Compensation” sections elsewhere in this proxy statement.

Non-employee directors are granted awards under the Equity Plans for the purpose of aligning non-employee director interests with shareholder interests and to aid in the retention of such directors.  The allocation of awards to non-employee directors may be made based on the director’s responsibilities and years of service at the time of grant.  Directors who hold the title of chairperson or vice-chairperson, or who were a committee chairperson, may receive a greater allocation of awards than those who did not hold such positions.  The grant of awards to non-employee directors may also be made in lieu of cash compensation that would otherwise be paid as director fees in order to further align the non-employee director interests with shareholder interests.



Director Compensation Table. The following table sets forth information regarding compensation earned by our non-employee directors during the 2022 fiscal year.    



















CORPORATE GOVERNANCE 

Our Board of Directors has adopted Corporate Governance Guidelines that contain a number of corporate governance initiatives designed to comply with NASDAQ corporate governance listing standards, the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC. We have also adopted charters for the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee in order to implement these rules and standards.  Current versions of the Audit, Compensation and Nominating and Corporate Governance Committee charters are available on our website, www.lakeshoresavings.com under “About Us”, “Investor Relations” - “Corporate Overview” - Governance Documents” section.  The information set forth on our website shall not be deemed filed with, and is not incorporated by reference into, this proxy statement or any of our other filings under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended, except to the extent that we specifically so provide.

Board of Directors Independence 

Annually, the Board of Directors determines director independence as defined by NASDAQ listing rule 5605(a)(2).  The annual review includes reviewing the relationships that each director, his or her immediate family members and his or her related affiliates had  with the Company.  In making its determination as to the independence of its directors in accordance with NASDAQ listing standards rules, a review of the outstanding loans that directors Bennett, Brautigam, and Sanvidge and their family members or affiliates had with the Company was completed, and it was noted that the loans were made in the ordinary course of business with substantially the same terms prevailing for loans made to others unrelated to the Company and did not involve more than the normal risk of collectability or present other unfavorable features.  A review was also made of the Company’s donations to charitable organizations with which Mr.

Bennett (or his family members) is affiliated.  The Board of Directors made the determination that the above-named directors remained independent.



The table below notes independent directors and committee assignments in 2022.  As noted in the table below, the Board of Directors is comprised of a majority of directors who qualify as independent according to NASDAQ Stock Market Rules.





Mr. Daniel P. Reininga was not an independent director because he was the President and CEO of the Company in 2022. 

Leadership Structure of the Board of Directors

The positions of Chief Executive Officer of the Company and the Chairman of the Board of Directors are expected to continue to be held by two different individuals.  The Chairman of the Board is an independent, non-employee director.  We believe that this structure provides strength to the Company by giving the Chief Executive Officer a respected voice to our Board, while at the same time giving leadership of the Board to an independent person who, together with the other Directors, provides active oversight of management and its implementation of the strategic plans of the Board. Each of our Directors serves on one or more of the committees of the Board and actively and regularly participates in the various functions of these committees.  The committee structure enables the duties of the Board to be divided among the Directors.  This division of duties allows each of the Directors to concentrate his or her energies in a focused way on a narrower area of Board responsibility and helps insure that adequate time is being given to the many oversight responsibilities of the Board. We believe that the size of our Board provides a sufficient number

of Directors to serve on each of the Board’s committees, but is not so large as to be cumbersome or excessively expensive to the Company.

Committees of the Board of Directors 

Our Board of Directors has established the following committees: 

Audit Committee. The Audit Committee oversees and monitors the integrity of the Company’s financial reporting process and systems of internal control regarding finance, accounting and regulatory compliance. The Audit Committee retains, oversees and monitors the independence and performance of the Company’s independent registered public accounting firm.  The Audit Committee also oversees and monitors the independence and performance of the internal audit department and acts as an avenue of communication between the independent registered public accounting firm, management, the internal audit department and the Board of Directors.  The Audit Committee meets with the external auditors to review quarterly and annual SEC filings, the results of the annual audit and other related matters.



Our Board of Directors has determined that Mr. Bennett qualifies as an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K. The Audit Committee has chosen Mr. Bennett to serve as the “financial expert” on behalf of the Company. The Audit Committee met nine times during 2022.

Compensation Committee.  The Compensation Committee evaluates the performance of our management team and recommends compensation based upon that performance. It oversees executive compensation and director compensation by approving salary increases and reviewing general personnel matters such as Named Executive Officer performance evaluations. The Compensation Committee annually reviews and makes recommendations to the Board of Directors with respect to the compensation of directors and Named Executive Officers.  It is also responsible for approving, evaluating and administering compensation structure, policies and programs, which includes benefit plans, such as the Company’s 401K and ESOP plan, as well as incentive plans and stock compensation plans. 

The Compensation Committee relied on an American Bankers Compensation and Benefits survey and engaged an independent compensation consultant,  McLagan of Aon Plc (“McLagan”), to conduct an extensive peer review survey of salary and incentives for NEOs which was completed in December 2021.  The survey and peer review were used as guidance in determining the appropriate salaries for Named Executive Officers and director fees for 2022.   Based on this information, the Compensation Committee decided on a percentage increase in base salary for each of the Named Executive Officers.  The percentage increase in base salary for the President and CEO and for the Executive Vice President- Commercial Division was 1.96% and for the Chief Financial Officer was 4.90%.  The Compensation Committee did not make any changes to director fees for 2022. 



The Compensation Committee takes into account numerous factors when determining a recommendation for the salaries and incentive goals of Named Executive Officers.  In addition to information obtained from American Bankers Compensation and Benefits survey and information provided from the Compensation Committee’s independent compensation consultant, the Compensation Committee also obtains the CEO’s recommendation for proposed salary increases

and incentive goals for the Named Executive Officers (other than the President and CEO).  The results of the non-binding shareholder vote to approve the compensation of the Company’s Named Executive Officers from the most recent shareholders’ meeting are also reviewed by the Compensation Committee.  The Compensation Committee considers Lake Shore Savings’ performance in the prior year,  Lake Shore Savings’ strategic plans and goals for the future, and position scope (for positions other than the President and CEO) as part of its decision process to decide upon a recommendation for salaries and incentive goals for the Named Executive Officers. 

The Compensation Committee will submit to the full Board of Directors for approval their own recommendations on compensation for Named Executive Officers and directors.  The Compensation Committee met seven times during 2022. 





Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee recommends the nomination of directors to the full Board of Directors to fill the terms for the upcoming year or to fill vacancies during a term. The Nominating and Corporate Governance Committee considers recommendations from shareholders if submitted in a timely manner in accordance with the procedures established by the Committee and applies the same criteria to all persons being considered. The Nominating and Corporate Governance Committee also assists the Board of Directors in monitoring a process to assess Board of Directors’ effectiveness and in developing and implementing our corporate governance guidelines and reviewing and approving all transactions with affiliated parties. The Nominating and Corporate Governance Committee monitors our regulatory compliance and our compliance with our corporate governance guidelines.  In addition, the Nominating and Corporate Governance Committee recommends to the full Board the assignment of Directors to the committees of the Board, which responsibility includes a determination of the independence of individual directors according to the NASDAQ and SEC rules.  The Nominating and Corporate Governance Committee also oversees periodic evaluations of individual Directors and of the full Board of Directors, to insure their effectiveness.  Lastly, the Nominating and Governance Committee assists the Board of Directors in selecting a President and Chief Executive Officer and in selecting a chairperson for the Board of Directors by overseeing the succession process for these positions.  The Committee also ensures that an emergency succession plan for the Chief Executive Officer is in place and is annually updated. 



The Nominating and Corporate Governance Committee met five times during 2022.  

The Nominating and Corporate Governance Committee has adopted procedures for the submission of recommendations for director nominees by our shareholders.  If a determination is made that an additional candidate is needed for the board of directors, the Nominating and Corporate Governance Committee will consider candidates submitted by our shareholders.  Shareholders can submit the names of qualified candidates for director by writing to the chairperson of the Nominating and Corporate Governance Committee at 31 East Fourth Street, Dunkirk, New York 14048.  The chairperson must receive a submission not less than 180 days prior to the anniversary date of our proxy materials for the preceding year’s annual meeting. The submission must include the following information:





A nomination submitted by a shareholder for presentation by the shareholder at an annual meeting of shareholders must comply with the procedural and informational requirements described in our bylaws.

Shareholder nominees are analyzed by the Committee in the same manner as nominees that are identified by the Committee.  We do not pay a fee to any third party to identify or evaluate nominees.  As of April 4, 2023, the Committee had not received any shareholder recommendations for nominees in connection with the Annual Meeting.

Consideration of Director Candidates

It is the policy of the Nominating and Corporate Governance Committee to select individuals as director nominees with the goal of creating a balance of knowledge, experience and interest on the Board.  The Committee evaluates candidates for their character, judgment, business experience and acumen.  The Nominating and Corporate Governance Committee considers the following skills and characteristics when deciding which individuals to nominate for election as director:















The Nominating and Corporate Governance Committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective director candidates. For a discussion of the specific backgrounds and qualifications of our current directors and director nominees, see “Information about our Board of Directors – Business Experience of Directors.”



Board Composition

The Company believes in the benefits that diversity brings to the Board of Directors.  Based upon voluntary self-identification by each member of the Company’s Board of Directors, the diversity composition of the Board of Directors for the current year is disclosed as follows:











Risk Oversight by the Board of Directors

The Board of Directors is responsible for the oversight of risks that could have a material effect on the Company.  This oversight is conducted primarily by the Enterprise Risk Committee, with the assistance of other committees of the Board.  The Enterprise Risk Committee oversees and monitors the Bank’s enterprise risk management program.  A key role of the Enterprise Risk Committee is to coordinate with Management, Board Committees and the Board of Directors to ensure all parties accountable for risk understand the risks to the institution and confirm that risks are identified, measured, monitored and controlled. The Board of Directors satisfies this responsibility through full reports by each committee chairperson regarding the committee’s considerations and actions, as well as through regular reports directly from members of management who are responsible for oversight of particular risks within the Company, including credit, interest rate, liquidity, price, strategic, reputational, operational, information technology (including cybersecurity), and compliance.     

Code of Conduct and Ethics 

We have adopted a Code of Conduct and Ethics that is applicable to all officers, directors and employees of Lake Shore Bancorp and its affiliates, including our principal executive officer and principal financial and accounting officer. A copy of the Code of Conduct and Ethics is available at our website, www.lakeshoresavings.com under “About Us”, “Investor Relations” – 

“Corporate Overview” - “Governance Documents” section.  The information set forth on our website shall not be deemed filed with, and is not incorporated by reference into, this proxy statement or any of our other filings under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as amended, except to the extent that we specifically so provide.

Anti-Hedging Policy

The Company’s Insider Trading Policy prohibits its directors, officers or other employees from engaging in short sales of Company stock, as well as transactions in any puts, calls or other derivative securities on Company stock in any organized market, or “hedging”.  The Insider Trading Policy also prohibits employees, officers and directors of the Company from pledging its Company stock or depositing any Company stock in a margin account. 



Shareholder Communications with the Board of Directors 

Shareholders may contact our Board of Directors, our independent directors as a group, or an individual director by contacting Rachel A. Foley, Investor Relations, Lake Shore Bancorp, Inc., 31 East Fourth Street, Dunkirk, New York 14048. All comments will be forwarded directly to the Board of Directors, the independent directors as a group, or the individual director, as applicable. 





Business Experience of Executive Officers 

The business experience for each of our executive officers who are not directors is set forth below.  All executive officers have held their current positions for five years unless otherwise indicated.

Jeffrey M. Werdein was appointed the Interim Principal Executive Officer in March 2023.  He is also the Executive Vice President for the Commercial Division of Lake Shore Bancorp and Lake Shore Savings. He was appointed Executive Vice President in August 2014 after serving as the Senior Vice President responsible for business development in the commercial real estate and small/middle market business segments at Evans Bank since 1999. Mr. Werdein has over 30 years of commercial banking experience, including prior positions with Citibank and Chase Manhattan Bank.  Mr. Werdein has a Bachelor of Science degree and a Masters of Business Administration degree with a focus in Business and Financial Institutions and Markets from the State University of New York at Buffalo. Mr. Werdein is a graduate of the American Bankers Association Stonier National Graduate School of Banking.

Rachel A. Foley is the Chief Financial Officer and Treasurer of Lake Shore, MHC, Lake Shore Bancorp and Lake Shore Savings. She was appointed Chief Financial Officer of the Company in March 2006 after serving as the Controller since March 1999. Ms. Foley has a Bachelor of Science degree from Allegheny College and a Master of Business Administration degree in Accounting from the University at Buffalo.  Ms. Foley is a graduate of the American Bankers Association Stonier National Graduate School of Banking and is certified as an Accredited ACH Professional (AAP).  Prior to joining the Company, Ms. Foley was a Financial Audit Supervisor in the Internal Audit department of M&T Bank Corporation.



 Jennifer L. Zatkos is the Chief Operating Officer of Lake Shore Saving Bank. She was appointed Chief Operating Officer of the Bank in November 2022 after serving as the Head of Fraud at Voyager Digital since February 2022.  Prior to that she was the Senior Vice President, Director of Financial Crimes Case Intake and Investigations at M&T Bank Corporation in Buffalo, New York from August 2020 through February 2022.  Ms. Zatkos has also held the position of Administrative Vice President, Financial Crimes Alert Management from 2015 until 2020 at M&T Bank Corporation.  Ms. Zatkos has a Bachelor of Arts in Communication degree from the State University of New York at Buffalo and is a Certified Fraud Examiner (CFE).



Robert Cortellucci is the Chief Technology Officer of Lake Shore Saving Bank, He was appointed Chief Technology Officer of the Bank in November 2022 after having worked in several different industries including banking, healthcare, and logistics. He earned his bachelor’s degree from the State University of New York at Buffalo. Cortellucci most recently served as the Manager of Information Technology at FedEx Trade Networks since January 2020, where he led multiple cross-functional teams responsible for developing a customs brokerage solution for the company.  Prior to that he was the Senior Director, Information Technology at Kaleida Health from May 2017 until January 2019.  Mr. Cortellucci also held the position of First Vice President, Technology Relationship Management, Consumer and Digital Banking Systems from 2014 until 2016 at First Niagara Bank and the position of Information Technology Manager with HSBC Bank from 2001 through 2014. 



Compensation Plans

Annual Incentive Plan.    Lake Shore Bancorp provides performance-based bonuses to its Named Executive Officers pursuant to the Annual Incentive Plan, which is designed to link awards to our strategic and operating objectives.  The goal of the plan is to have long-term viability and to be attractive to new hires and help retain current employees.  The plan measures business plan goals and objectives and clearly defines these for the calendar year for which the plan is in effect. 

For purposes of the annual bonus, each Named Executive Officer is evaluated on several corporate performance measures which are established at the beginning of the year and relate to strategic business objectives for the ensuing year.  The Named Executive Officers, with the exception of the President and CEO, are also evaluated on individual performance measures that take into account individual responsibilities, in addition to the corporate performance measures.  The Compensation Committee establishes the performance measures for each of the Named Executive Officers. The President and Chief Executive Officer is not involved in decisions regarding his own performance-based bonus.  Decisions relating to the President and Chief Executive Officer’s performance-based compensation are determined and recommended by the Compensation Committee. The Compensation Committee will present the performance measures to the Board of Directors for approval. The individual metrics are discussed under footnote 4 of the Summary Compensation Table, shown below.

Supplemental Executive Retirement Plans.    Lake Shore Savings entered into separate supplemental benefit plans with certain officers.  Under the supplemental benefit plans, each officer is fully vested in an annual benefit, payable in monthly installments, and the annual benefit is equal to (i) 2% of the officer’s average final pay (which is defined as the average pay over the two years prior to termination of service), multiplied by (ii) the officer’s years of service (with a maximum percentage of 40% of average final pay for Ms. Foley and Mr. Werdein).  The benefit amount is payable over a period of fifteen years commencing at age 65, and in the event of a change of control, the executive is treated as having attained age 65 for purposes of benefit payments.  In connection with Mr. Reininga’s retirement on March 10, 2023, he is entitled to his vested benefits under the supplemental benefit plan and, in addition, his vested benefits under a supplemental executive retirement plan that Lake Shore Savings and Mr. Reininga entered into in 2017.  Mr. Reininga will not receive any additional benefits or payments under either supplemental benefit plan in connection with his retirement and he will only receive his vested benefits.

Retention Agreement.    In order to provide further incentive for Jeffrey M. Werdein, Executive Vice President Commercial Division of the Company and Bank, to remain in the employ of the Bank, Lake Shore Savings entered into a retention agreement with Mr. Werdein on March 29, 2018.  Under the agreement, Mr. Werdein will receive a total of $1.4 million provided that he remains continuously employed with the Bank through March 29, 2028, payable in three equal installments on March 29, 2028,  January 2, 2029 and January 2, 2030.  In the event Mr. Werdein’s employment is terminated without cause, for good reason or due to death or disability prior to March 29, 2028, Mr. Werdein will receive the vested account balance as set forth in the agreement.  Subject to regulatory approval, if Mr. Werdein’s employment is terminated within two years of a change of control and prior to March 29, 2028, Mr. Werdein may receive up to $1.4 million in a lump sum. 

Employee Stock Ownership Plan.    This plan is a tax-qualified plan that covers substantially all employees who have at least one year of service with Lake Shore Savings and have attained age 21. Lake Shore Bancorp loaned the Employee Stock Ownership Plan Trust sufficient funds to purchase a number of shares equal to 8% of the shares sold in Lake Shore Bancorp’s stock offering to persons other than Lake Shore, MHC, or 238,050 shares. These shares were purchased in the open market following completion of the offering at prevailing market prices.

Although contributions to the plan are discretionary, Lake Shore Savings intends to contribute enough money each year to make the required principal and interest payments on the loan from Lake Shore Bancorp. This loan is for a term of 30 years and calls for annual payments of principal and interest. The plan pledges the shares it purchases as collateral for the loan and holds them in a suspense account.

The plan will not distribute the pledged shares right away. Instead, it will release a portion of the pledged shares annually. Assuming the plan repays its loan as scheduled over a 30-year term, we expect that 1/30th of the shares will be released annually in years 2006 through 2035. Although the repayment period of the loan is scheduled over a 30-year term, we anticipate that we may prepay a portion of the principal which would trigger the release of additional shares. The plan will allocate the shares released each year among the accounts of participants in proportion to their compensation for the year. For example, if a participant’s compensation for a year represents 1% of the total compensation of all participants for the year, the plan would allocate to that participant 1% of the shares released for the year. Participants direct the voting of shares allocated to their accounts. Shares in the suspense account and allocated shares for which no voting instructions are received will be voted in a way that mirrors the votes which participants cast for shares in their individual accounts.

401(k) Defined Contribution Plan.    The Lake Shore Savings tax-qualified 401(k) defined contribution plan is maintained for employees who have completed three months of service and attained age 21.  Eligible employees may make pre-tax contributions to the 401(k) Plan in the form of salary deferrals of up to 75% of their total annual compensation subject to certain IRS limitations.  The plan consists of three components: 401(k), Profit Sharing and Safe Harbor. For the 401(k) component, the Company makes a matching contribution equal to 40% of the eligible employee’s salary deferral, up to 6% of such employee’s compensation after one year of service.  For the profit sharing component, the Company makes a discretionary contribution, up to 5.1% of an eligible employee’s salary, depending on years of service.  Lastly, the Company contributes 3.4% of an eligible employee’s salary based on years of service, which is a discretionary contribution to the Safe Harbor component of the plan.   

2006 Stock Option Plan.  Stock options can no longer be granted under the Lake Shore Bancorp, Inc. 2006 Stock Option Plan since the plan was adopted more than 10 years ago.  Stock options previously granted under this plan remain outstanding and are subject to the terms and conditions of this plan. 

Upon the exercise of an option, the exercise price of the option must be paid in full. Payment may be made in cash, with common stock of Lake Shore Bancorp already owned by the option holder, shares to be acquired by the option holder upon exercise of the option or such other consideration as the Compensation Committee authorizes.  If the option is not exercised during its term, it will expire. 

2012 Equity Incentive Compensation.    The Lake Shore Bancorp, Inc. 2012 Equity Incentive Plan (the “Equity Incentive Plan”) provides officers, employees and directors of Lake Shore Bancorp and Lake Shore Savings with incentives to promote our growth and performance and shareholders approved the Equity Incentive Plan at the 2012 Annual Shareholders Meeting.         

The Equity Incentive Plan authorizes the issuance of up to 180,000 shares of our common stock pursuant to grants of restricted stock awards and up to 20,000 shares of our common stock pursuant to grants of incentive stock options and non-qualified stock options, subject to permitted adjustments for certain corporate transactions.  Employees and directors of Lake Shore Bancorp or its subsidiaries are eligible to receive awards under the Equity Incentive Plan, except that non-employees may not be granted incentive stock options.