Note 8 – Stock-based Compensation

As of June 30, 2020, the Company had four stock-based compensation plans, which are described below. The compensation cost that has been recorded under salary and benefits expense in the non-interest expense section of the consolidated statements of income for these plans was $84,000 and $119,000 for the three months ended June 30, 2020 and 2019, respectively. The compensation cost that has been recorded for the six months ended June 30, 2020 and 2019 was $152,000 and $239,000, respectively.

2006 Stock Option Plan

The Company’s 2006 Stock Option Plan (the “Stock Option Plan”), which was approved by the Company’s stockholders, permitted the grant of options to its employees and non-employee directors for up to 297,562 shares of common stock. The Stock Option Plan expired on October 24, 2016, and grants of options can no longer be awarded.

Both incentive stock options and non-qualified stock options have been granted under the Stock Option Plan. The exercise price of each stock option equals the market price of the Company’s common stock on the date of grant and an option’s maximum term is ten years. The stock options generally vest over a five year period.

A summary of the status of the Stock Option Plan during the six months ended June 30, 2020 and 2019 is presented below:


	2020				2019
	Options		Weighted Average Exercise Price	Remaining Contractual Life	Options		Weighted Average Exercise Price	Remaining Contractual Life
Outstanding at beginning of year	64,548	$	14.38		82,321	$	12.98
Granted	-		-		-		-
Exercised	-		-		-		-
Outstanding at end of period	64,548	$	14.38	6.3 years	82,321	$	12.98	5.9 years

Options exercisable at end of period	38,726	$	14.38	6.3 years	43,591	$	11.73	5.9 years

Fair value of options granted		$	-			$	-

At June 30, 2020, stock options had no intrinsic value and there were no remaining options available for grant under the Stock Option Plan. There were no stock options exercised during the three and six months ended June 30, 2020 and 2019. Compensation expense related to the Stock Option Plan for the three month periods ended June 30, 2020 and 2019 was $8,000. Compensation expense related to the Stock Option Plan for the six month periods ended June 30, 2020 and 2019 was $17,000. At June 30, 2020, $45,000 of unrecognized compensation cost related to the Stock Option Plan is expected to be recognized over a period of 16 months.

2006 Recognition and Retention Plan

The Company’s 2006 Recognition and Retention Plan (“RRP”), which was approved by the Company’s stockholders, permitted the grant of restricted stock awards (“Awards”) to employees and non-employee directors for up to 119,025 shares of common stock. The RRP expired on October 24, 2016, and as of October 24, 2016, all shares permitted under the plan have been granted.

As of June 30, 2020, there were 115,770 shares vested or distributed to eligible participants under the RRP. Compensation expense amounted to $6,000 and $22,000 for the three months ended June 30, 2020 and 2019, respectively. Compensation expense amounted to $12,000 and $44,000 for the six months ended June 30, 2020 and 2019, respectively. At June 30, 2020, $30,000 of unrecognized compensation cost related to the RRP is expected to be recognized over a period of 16 months.

A summary of the status of unvested shares under the RRP for the six months ended June 30, 2020 and 2019 is as follows:


	At June 30, 2020		Weighted Average Grant Price (per Share)	At June 30, 2019		Weighted Average Grant Price (per Share)
Unvested shares outstanding at beginning of year	3,255	$	14.37	10,188	$	13.27
Granted	-		-	-		-
Vested	-		-	-		-
Unvested shares outstanding at end of period	3,255	$	14.37	10,188	$	13.27

2012 Equity Incentive Plan

The Company’s 2012 Equity Incentive Plan (the “EIP”), which was approved by the Company’s stockholders on May 23, 2012, authorizes the issuance of up to 180,000 shares of common stock pursuant to grants of restricted stock awards and up to 20,000 shares of 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 EIP, except that non-employees may not be granted incentive stock options.

The Board of Directors granted restricted stock awards under the EIP during the six months ended June 30, 2020 as follows:


Grant Date	Number of Restricted Stock Awards	Vesting		Fair Value per Share of Award on Grant Date	Awardees

February 5, 2020	5,513	100% on December 11, 2020	$	15.51	Non-employee directors
February 26, 2020	15,317	100% on February 26, 2023 if three year performance metric is achieved		15.39	Employees

A summary of the status of unvested restricted stock awards under the EIP for the six months ended June 30, 2020 and 2019 is as follows:


	At June 30, 2020		Weighted Average Grant Price (per Share)	At June 30, 2019		Weighted Average Grant Price (per Share)
Unvested shares outstanding at beginning of year	-	$	-	25,321	$	15.28
Granted	20,830		15.42	5,186		15.89
Vested	-		-	-		-
Forfeited	(332)		15.39	(760)		15.90
Unvested shares outstanding at end of period	20,498	$	15.42	29,747	$	15.37

As of June 30, 2020, there were 83,572 shares of restricted stock that vested or was distributed to eligible participants under the EIP. Compensation expense related to unvested restricted stock awards under the EIP amounted to $44,000 and $59,000 for the three months ended June 30, 2020 and 2019, respectively. Compensation expense related to unvested EIP restricted stock awards during the six months ended June 30, 2020 and 2019 was $67,000 and $115,000, respectively. At June 30, 2020, $249,000 of unrecognized compensation cost related to unvested restricted stock awards is expected to be recognized over a period of 32 months.

A summary of the status of stock options under the EIP for the six months ended June 30, 2020 and 2019 is presented below:


	At June 30, 2020				At June 30, 2019
	Options		Exercise Price	Remaining Contractual Life	Options		Exercise Price	Remaining Contractual Life
Outstanding at beginning of year	20,000	$	14.38		20,000	$	14.38
Granted	-		-		-		-
Exercised	-		-		-		-
Forfeited	-		-		-		-
Outstanding at end of period	20,000	$	14.38	6.3 years	20,000	$	14.38	7.3 years

Options exercisable at end of period	11,999	$	14.38	6.3 years	7,997	$	14.38	7.3 years

Fair value of options granted			-				-

At June 30, 2020, stock options had no intrinsic value and there were no remaining options available for grant under the EIP. Compensation expense related to stock options outstanding under the EIP amounted to $3,000 for the three months ended June 30, 2020 and 2019 and $5,000 for the six months ended June 30, 2020 and 2019. At June 30, 2020, $14,000 of unrecognized compensation cost related to unvested stock options is expected to be recognized over a period of 16 months.

Employee Stock Ownership Plan (“ESOP”)

The Company established the ESOP for the benefit of eligible employees of the Company and Bank. All Company and Bank employees meeting certain age and service requirements are eligible to participate in the ESOP. Participants’ benefits become fully vested after five years of service once the employee is eligible to participate in the ESOP. The Company utilized $2.6 million of the proceeds of its 2006 stock offering to extend a loan to the ESOP and the ESOP used such proceeds to purchase 238,050 shares of stock on the open market at an average price of $10.70 per share, plus commission expenses. As a result of the purchase of shares by the ESOP, total stockholders’ equity of the Company was reduced by $2.6 million. As of June 30, 2020, the balance of the loan to the ESOP and the fair value of unallocated shares were $1.5 million, respectively. As of June 30, 2020, there were 78,017 allocated shares and 126,960 unallocated shares compared to 72,891 allocated shares and 134,895 unallocated shares at June 30, 2019. The ESOP compensation expense was $23,000 for the three months ended June 30, 2020 and $27,000 for the three months ended June 30, 2019 based on 1,984 shares earned in each of those quarters. The ESOP compensation expense was $51,000 for the six months ended June 30, 2020 and $58,000 for the six months ended June 30, 2019 based on 3,968 shares earned in each of those periods.