(

)

Stock

Compensation

Plan

2015

Stock Incentive Compensation Plan

The

2015

Stock Incentive Compensation Plan (the

“2015

Plan”) was approved by Shareholders at the Company’s annual meeting of shareholders on

May 20, 2015,

and permits the Company to grants its key employees and directors stock options, stock appreciation rights, performance shares, and phantom stock. Under the

2015

Plan, the number of shares which

may

be issued is

500,000,

but in

instance more than

15%

of the issued and outstanding shares of the Company’s common stock. As of

December 31, 2019

272,267

stock options have been granted under the

2015

plan and

202,826

options are available for grant.

A summary of the activity in the Company’s

2015

Plan is as follows:

						Weighted-
				Weighted-		Average
				Average		Remaining	Aggregate
	Number of			Exercise		Contractual	Intrinsic
	Options			Price		Term	Value

Outstanding at December 31, 2017		11,540		$	17.03
Options granted		252,917			19.91
Options forfeited		(1,000	)		20.09
Outstanding at December 31, 2018		263,457		$	19.78
Options granted		22,000			20.21
Forfeited		(13,190	)		20.09
Outstanding at December 31, 2019		272,267		$	19.80	7.8 years	$	77,000
Exercisable at December 31, 2019		71,827		$	18.97	6.2 years	$	77,000

The fair value of shares vested and recognized as compensation expense was

$158,000

for the year ended

December 31, 2019

and

$145,000

for the year ended

December 31, 2018

. The Company recognized

an income tax benefit of

$19,000

and

$20,000

with respect to share-based compensation in

2019

and

2018,

respectively. Att

December 31, 2019

, there was

$539,000

of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the

2015

Plan. The cost is expected to be recognized over a weighted-average period of

3.4

years.

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Year ended December 31,
	2019		2018
Weighted average risk-free interest rate		1.88%		1.47-2.63%
Expected dividend yield		0.59%		0.41-0.50%
Expected stock volatility		9.90%		10.07-11.90%
Expected life in years		6.5		1.0-6.5
Per share fair value of options issued during year		$2.74	$1.08-$3.35

The Company used the guidance in Staff Accounting Bulletin

No.

107

to determine the estimated life of options issued. Expected volatility is based on volatility of similar companies’ common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the Company’s history and expectation of dividend payouts.

2007

Stock Option Plan

As of

May 20, 2015,

further grants will be made under the

2007

Stock Option Plan (the

“2007

Plan”). Unexercised stock options that were granted under the

2007

Plan will remain outstanding and will expire under the terms of the individual stock grant. A summary of the activity in the Company’s

2007

Plan is as follows:

						Weighted-
				Weighted-		Average
				Average		Remaining	Aggregate
	Number of			Exercise		Contractual	Intrinsic
	Options			Price		Term	Value

Outstanding at December 31, 2017		22,200		$	10.31
Options exercised		(17,150	)		10.02
Options forfeited		(350	)		10.00
Outstanding at December 31, 2018		4,700		$	11.37
Options exercised		(500	)		10.00
Options forfeited		(2,000	)		10.72
Outstanding at December 31, 2019		2,200		$	12.27	0.32 years	$	17,000
Exercisable at December 31, 2019		2,200		$	12.27	0.32 years	$	17,000

December 31, 2019

, there was

unrecognized compensation expense related to non-vested, share-based compensation arrangements granted under the

2007

plan.

Directors' Plan

The Directors’ Plan permits the Company’s and the Bank’s directors to elect to receive any compensation to be paid to them in shares of the Company’s common stock. Pursuant to the Directors’ Plan, each director is permitted to make an election to receive shares of stock instead of cash. To encourage directors to elect to receive stock, the Directors’ Plan provides that if a director elects to receive stock, he or she will receive in common stock

110%

of the amount of cash fees set by the Board or the Compensation and Nominating Committee. The value of stock to be awarded pursuant to the Directors’ Plan will be the closing price of a share of common stock as traded on the OTCQX or a price set by the Board or its Compensation and Nominating Committee, acting in good faith, but in

case less than fair market value. In

2019,

the Board used the greater of quarter-end book value and quarter-end volume weighted average market price to determine what the fair market value of Prime Meridian common stock was for purposes of the Directors’ Plan. The maximum remaining number of shares to be issued pursuant to the Directors’ Plan is limited to

51,640

shares, which is approximately

1.62%

of the total shares outstanding as of the record date. In

2019

and

2018,

our directors received

3,643

and

2,818

shares of common stock, respectively, in lieu of cash, under the Directors’ Plan. The Company recognized expense of

$72,000

and

$60,000

uring the years ended

December 31, 2019

and

2018

, with respect to the Director’s Plan.

Restricted Stock

The Company issued

3,600

restricted common stock shares to its CEO in the

first

quarter of

2019

as part of his bonus incentive earned for the Company's performance in

2018.

One-

third

of the balance, or

1,200

shares, vest each year beginning

February 21, 2020.

Stockholders of unvested restricted stock have the right to vote and the right to receive dividends declared on common stock, if any. A summary of restricted stock transaction follows:

			Wtd-Avg
	Number of		Grant Date		Grant Date
	Shares		Fair Value per Share		Fair Value
Non-vested restricted stock issued in 2019		3,600	$	18.52	$	67,000
Non-vested restricted stock outstanding at December 31, 2019		3,600	$	18.52		67,000

During the year ended

December 31, 2019,

the Company recognized

$19,000

as expense and had

$48,000

in unrecognized expense to be recognized over a weighted-average period of

2.2

years.