Note 9. Stock Based Compensation

Restricted stock, options and restricted stock units typically have a three-year vesting period starting one year after the date of grant with one-third vesting each year. The options generally expire ten years from the date of grant. Restricted stock granted to new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years or upon a change of control. All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the awards vesting. Restricted shares have the same dividend and voting rights as common stock, while options, performance units and restricted stock units do not.

All awards are issued at fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are handled on a case-by-case basis. Compensation expense for the three and nine months ended September 30, 2018 were $0.6 million and $1.3 million, respectively, while the compensation expense for the three and nine months ended September 30, 2017 were $0.5 million and $1.3 million, respectively.

Activity under the Company’s options as of and for the nine months ended September 30, 2018 was as follows:

					Weighted-
					Average
			Weighted-		Remaining
	Number of		Average		Contractual
	Stock		Exercise		Term	Aggregate
	Options		Price		(in years)	Intrinsic Value
Outstanding at December 31, 2017	299,778		$	6.18
Granted	-
Exercised	(102,378	)		5.12
Forfeited/cancelled/expired	(1,323	)		14.24
Outstanding at September 30, 2018	196,077			6.68	1.8	$	3,346,546

Exercisable at September 30, 2018	196,077		$	6.68	1.8	$	3,346,546

The aggregate intrinsic value of outstanding and exercisable options above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on September 30, 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2018. This amount changes based on the fair market value of the Company’s stock.

Activity under the Company’s restricted shares as of and for the nine months ended September 30, 2018 was as follows:

			Weighted-
			Average
	Nonvested		Grant Date
	Shares		Fair Value
Nonvested at December 31, 2017	103,078		$	20.41
Granted	23,018			28.08
Vested	(58,002	)		20.33
Forfeited/cancelled/expired	(666	)		24.25
Nonvested at September 30, 2018	67,428			23.07

As of September 30, 2018, there was approximately $920,000 of total unrecognized compensation cost related to nonvested restricted shares granted under the plans. The cost is expected to be recognized over a weighted average period of 1.1 years. A total of -0- and 23,018 restricted shares were granted during the three and nine months ended September 30, 2018, respectively, and 1,000 and 56,164 for the three and nine months ended September 30, 2017, respectively.

A summary of the status of unearned performance unit awards and the change during the period is presented in the table below:

				Weighted
				Average Grant
	Units		Units	Date Fair
	(expected)		(maximum)	Value
Unearned at December 31, 2017	151,194			$	19.19
Awarded	19,614				31.35
Change in Estimate	(15,172	)
Vested	(69,627	)			19.46
Unearned at September 30, 2018	86,009		151,772	$	22.06

At September 30, 2018, the specific number of shares related to performance units that were expected to vest was 86,009, determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be reversed. At September 30, 2018 the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 151,772.

At September 30, 2018, compensation cost of approximately $822,000 related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.8 years. A total of -0- and 19,614 performance units were awarded during the three and nine months ended September 30, 2018, respectively.

During the nine months ended September 30, 2018, 69,627 shares were issued in satisfaction of earned performance units. The shares issued were calculated based on a net down of 26,955 shares to satisfy tax obligations created by vesting.

A summary of the status of unearned restricted stock units and the change during the period is presented in the table below:

		Weighted
		Average Grant
	Units	Date Fair
	(expected)	Value
Unearned at December 31, 2017	-	$	-
Awarded	29,423		31.35
Forfeited	-		-
Vested	-		-
Unearned at September 30, 2018	29,423	$	31.35

At September 30, 2018, the specific number of shares related to restricted stock units that were expected to vest was approximately 29,423. Any forfeitures would result in previously recognized expense being reversed. A portion of the shares that vest will be repurchased to satisfy the tax obligations of the recipient.

At September 30, 2018, compensation cost of approximately $756,000 related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 2.4 years. A total of 29,423 and -0- restricted stock units were awarded during the nine months ended September 30, 2018 and 2017, respectively.

Effective January 1, 2017, the Company implemented ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment.” Under ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Included in income tax expense for the nine months ended September 30, 2018 and September 30, 2017 is a benefit of approximately $887 thousand and $181 thousand, respectively, which resulted from the effect of implementing ASU 2016-09.