NOTE 20 – Stock-Based Compensation

Compensation cost is recognized for stock options and restricted stock awards issued to employees and non-employee directors. Compensation cost is measured as the fair value of these awards on their date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used as the fair value of restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option and restricted stock awards.

The Company’s stock incentive programs are long-term retention programs intended to attract, retain, and provide incentives for key employees and non-employee directors in the form of incentive and non-qualified stock options and restricted stock.

Stock-based compensation expense was recorded as follows:


	For the years ended December 31,
(dollars in thousands)	2016	2015	2014
Stock option expense	$ 746	556	430
Restricted stock grant expense	286	203	199
Total stock-based compensation expense	$ 1,032	759	629

Stock Options

On March 21, 2000, the Company adopted a stock option plan under which the board of directors could grant up to 436,424 options at an option price per share not less than the fair market value on the date of grant. The options expire 10 years from the grant date, but expired or forfeited options may be reissued. Under the terms of the 2000 stock option plan any awards remaining and granted after March 2010 are accounted for as non-qualified stock options. As of January 2011, all available options under the 2000 stock option plan had been granted.

On May 18, 2010, the Company adopted the 2010 Incentive Plan, making available for issuance 366,025 stock options (adjusted for the 10% stock dividends in 2013, 2012, and 2011). The options may be exercised at an option price per share based on the fair market value and determined on the date of grant and expire 10 years from the grant date. On May 20, 2014, the Company amended the 2010 Incentive Plan to add an additional 200,000 shares of common stock to be issuable as stock options, for a total of 566,025 shares.

On May 17, 2016, the Company adopted the 2016 Equity Incentive Plan, making available for issuance 400,000 stock options. The options may be exercised at an option price per share based on the fair market value and determined on the date of grant and expire 10 years from the grant date.

A summary of the status of the stock option plan and changes for the period is presented below:


	For the years ended December 31,
	2016						2015						2014
	Shares			Weighted average exercise price		Weighted Average Remaining Contractual Life	Shares			Weighted average exercise price		Weighted Average Remaining Contractual Life	Shares			Weighted average exercise price		Weighted Average Remaining Contractual Life
Outstanding at beginning of year		693,954		$	8.94			667,479		$	7.83			617,181		$	7.05
Granted		109,500			23.65			93,511			17.15			90,050			13.54
Exercised		(152,751	)		7.19			(67,036	)		9.36			(39,752	)		8.94
Forfeited or expired		8,500			15.69			-			-			-			-
Outstanding at end of year		642,203		$	11.77	5.9 years		693,954		$	8.94	6.0 years		667,479		$	7.83	6.2 years
Options exercisable at year-end		399,256		$	7.62	4.4 years		457,895		$	6.74	4.9 years		432,055		$	6.74	5.2 years
Weighted average fair value of options granted during the year				$	10.96					$	9.09					$	7.21
Shares available for grant		454,765						155,767						249,267

The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year and the exercise price, multiplied by the number of in-the-money options) of 642,203 and 693,954 stock options outstanding at December 31, 2016 and 2015 was $15.6 million and $9.5 million, respectively. The aggregate intrinsic value of 399,256 and 457,895 stock options exercisable at December 31, 2016 and 2015 was $11.4 million and $7.3 million, respectively.

The fair value of the option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for grants:


	2016	2015	2014
Dividend yield	-	-	-
Expected life	7 years	7 years	7 years
Expected volatility	43.22%	51.24%	49.90%
Risk-free interest rate	1.65%	1.63%	2.29%

At December 31, 2016, there was $1.5 million of total unrecognized compensation cost related to nonvested stock option grants. The cost is expected to be recognized over a weighted-average period of 2.6 years. The fair value of stock option grants that vested during 2016, 2015, and 2014 was $593,000, $491,000 and $473,000, respectively.

Restricted Stock Grants

In 2006, the Company adopted a restricted stock plan for the benefit of the directors, officers and employees. Under the restricted stock plan, 13,310 shares of restricted stock (adjusted for the stock dividends in 2011 and 2012) were authorized for issuance. As of December 31, 2012 all shares of restricted stock, authorized under the plan had been granted.

In May 2010, the Company adopted the 2010 Incentive Plan which included a provision for the issuance of 79,860 shares of restricted stock (adjusted for all subsequent stock dividends). On May 19, 2015, the Company amended the 2010 Incentive Plan to add an additional 25,000 shares of common stock to be issuable as restricted stock grants, for a total of 104,860 shares. As of December 31, 2016, there were 15,924 shares of restricted stock available for grant.

On May 17, 2016, the Company adopted the 2016 Equity Incentive Plan which included a provision for the issuance of 50,000 shares of common stock to be issuable as restricted stock grants.

Shares of restricted stock granted to employees under the stock plans are subject to restrictions as to continuous employment for a specified time period following the date of grant. During this period, the holder is entitled to full voting rights and dividends.

A summary of the status of the Company’s nonvested restricted stock and changes for the years ended December 31, 2016, 2015, and 2014 is as follows:


	December 31,
	2016		2015		2014
	Restricted Shares	Weighted Average Grant-Date Fair Value	Restricted Shares	Weighted Average Grant-Date Fair Value	Restricted Shares	Weighted Average Grant-Date Fair Value
Nonvested at beginning of year	33,749	$ 12.92	49,000	$ 11.83	61,624	$ 11.46
Granted	22,000	23.91	3,000	20.65	4,500	14.15
Vested	(17,749)	11.68	(18,251)	11.28	(17,124)	11.09
Forfeited	(1,875)	14.72	-	-	-	-
Nonvested at end of year	36,125	$ 20.13	33,749	$ 12.92	49,000	$ 11.83

At December 31, 2016, there was $573,000 of total unrecognized compensation cost related to nonvested restricted stock grants. The cost is expected to be recognized over a weighted-average period of 2.7 years.