8-K: Lake Shore Bancorp CEO's Employment and Retirement Agreements Updated

Lake Shore Bancorp has updated the employment and retirement agreements for its President and CEO, Kim C. Liddell, with a new three-year employment contract and a revised supplemental retirement plan.

Summary

• Lake Shore Bancorp has entered into a new three-year employment agreement with its President and CEO, Kim C. Liddell, effective December 16, 2024, replacing a prior agreement from July 16, 2024.
• The new agreement includes an initial base salary of $550,000, which has been increased to $605,000, and potential for annual performance-based cash bonuses and long-term incentive compensation.
• The agreement term automatically extends by one year on each anniversary, maintaining a three-year term, subject to board approval based on a performance evaluation.
• A change in control triggers an automatic renewal of the agreement for at least 36 months.
• The agreement outlines severance payments for involuntary termination without cause or resignation for good reason, including a lump sum payment equal to one year's base salary plus average annual incentive compensation, and continued health coverage for 12 months.
• In the event of termination within three months before or twelve months after a change in control, severance includes three times the sum of the base salary and the highest annual cash bonus, plus 36 months of continued health coverage.
• A new supplemental executive retirement plan (SERP) was also established, effective April 24, 2023, replacing a prior SERP from July 16, 2024.
• The SERP provides annual payments for 15 years upon retirement at or after age 67, or upon early termination, disability, death, or a change in control followed by a qualifying termination.
• Payments are based on the amount paid from annuity contracts held by the bank, with lifetime benefit riders.
• The SERP also includes provisions for disability, death, and change in control scenarios.

Sentiment

Score: 7

Explanation: The document reflects a positive and stable outlook for the company's leadership. The updated agreements provide clarity and security for the CEO, which is generally viewed favorably by investors. However, the non-compete and forfeiture clauses introduce some minor risks.

Positives

• The new employment agreement provides clarity and stability for the CEO's role.
• The increased base salary and potential for bonuses and long-term incentives align with performance and market standards.
• The automatic renewal clause provides long-term security for the CEO, subject to performance.
• The change in control provisions offer protection for the CEO in the event of a merger or acquisition.
• The SERP provides a structured retirement benefit, ensuring financial security for the CEO.
• The SERP's lifetime benefit feature provides long-term financial security.

Negatives

• The agreement includes restrictions on competition and solicitation for one year after termination, which could limit the CEO's future opportunities.
• The SERP benefits are subject to forfeiture if the CEO violates restrictive covenants after termination.
• The SERP is unfunded, meaning the benefits are subject to the bank's financial health.

Risks

• The bank's ability to meet its obligations under the SERP depends on its financial performance.
• The change in control provisions could incentivize the CEO to pursue a sale of the company.
• The non-compete clause could lead to legal disputes if the CEO seeks employment in the same industry after leaving the company.
• The SERP is subject to regulatory restrictions and could be impacted by changes in banking regulations.

Future Outlook

The employment agreement and SERP are designed to provide long-term stability and incentives for the CEO, aligning his interests with the company's success. The agreements also provide for a smooth transition in the event of a change in control.

Management Comments

• The Bank desires to continue to employ the Executive, and the Executive desires to continue to remain employed by the Bank, subject to the terms and conditions set forth in this Agreement.
• It is the intention of the Bank and the Executive that, subject to the direction and supervision of the Board, the Executive shall have full discretionary authority to control the day-to-day operations of the Bank and to incur such obligations on behalf of the Bank as may be necessary or appropriate in the ordinary course of its business.

Industry Context

The updated employment and retirement agreements are consistent with industry practices for executive compensation and benefits. These types of agreements are common for CEOs of publicly traded financial institutions to attract and retain top talent.

Comparison to Industry Standards

• The base salary of $605,000 is within the range for CEOs of similar-sized community banks. For example, CEOs of banks with similar asset sizes such as Community Bank System Inc. (CBU) and First Commonwealth Financial Corp (FCF) have base salaries in the $500,000 to $700,000 range.
• The inclusion of performance-based bonuses and long-term incentives is standard practice in the financial industry, aligning executive compensation with shareholder value creation. Many banks use a mix of cash bonuses, stock options, and restricted stock units.
• The severance packages, including continuation of health benefits, are also typical for executive employment agreements. The change in control provisions are designed to protect the CEO in the event of a merger or acquisition, which is a common practice in the industry.
• The SERP is a common tool for attracting and retaining executives, providing a supplemental retirement benefit beyond traditional 401(k) plans. Many banks offer similar plans to their top executives.
• The non-compete and non-solicitation clauses are standard in executive employment agreements to protect the bank's interests. These clauses are generally enforceable but must be reasonable in scope and duration.

Stakeholder Impact

• Shareholders will likely view the updated agreements positively, as they provide stability and incentives for the CEO.
• Employees may see the agreements as a sign of the company's commitment to its leadership.
• Customers and suppliers are unlikely to be directly impacted by these agreements.

Next Steps

• The board will conduct annual performance evaluations of the CEO to determine whether to extend the employment agreement.
• The compensation committee will consider awarding long-term incentive compensation to the CEO annually.
• The bank will administer the SERP according to its terms and provide annual statements to the CEO.

Key Dates

Keywords

employment agreement, executive compensation, supplemental executive retirement plan, CEO, change in control, severance, incentive compensation, retirement benefits, non-compete, Lake Shore Bancorp