The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017. The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of September 30, 2020. The maximum number of shares of common stock or equivalents which may be issued under the Plan, is 750,000. Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares, restricted share units or performance units. Shares available for grant and issuance under the Plan as of September 30, 2020 are approximately 313,054. The Company intends to issue all shares under the Plan in the form of newly issued shares.

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 the 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 recorded as incurred. Stock-based compensation expense for the three months and nine months ended September 30, 2020 and September 30, 2019 were $0.8 million and $2.0 million, respectively.

Activity under the Company’s options for the nine months ended September 30, 2020 was as follows:

	Number of Stock Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding as of December 31, 2019	73,426		$	8.19
Granted	-			-
Exercised	(25,413	)		7.39
Forfeited/cancelled/expired	-			-
Outstanding as of September 30, 2020	48,013		$	8.61	1.5	$	262,366

Exercisable as of September 30, 2020	48,013		$	8.61	1.5	$	262,366

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, 2020 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, 2020. This amount changes based on the fair market value of the Company’s stock.

CONNECTONE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 9. Stock Based Compensation – (continued)

Activity under the Company’s restricted shares for the nine months ended September 30, 2020 was as follows:

			Weighted-
			Average
	Nonvested		Grant Date
	Shares		Fair Value
Nonvested as of December 31, 2019	75,351		$	21.61
Granted	68,853			17.42
Vested	(51,292	)		21.33
Forfeited/cancelled/expired	(322	)		23.65
Nonvested September 30, 2020	92,590		$	18.64

As of September 30, 2020, there was approximately $1.2 million of total unrecognized compensation cost related to nonvested restricted shares granted. The cost is expected to be recognized over a weighted average period of 1.1 years.

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 as of December 31, 2019	90,097			$	23.85
Awarded	82,579				10.77
Change in estimate	2,490				22.75
Vested shares	(37,337	)			22.75
Unearned as of September 30, 2020	137,829		206,744	$	16.29

As of September 30, 2020, the specific number of shares related to performance units that were expected to vest was 137,829, 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. As of September 30, 2020 the maximum number of shares related to performance units that ultimately could vest if performance targets were exceeded is 206,744. During the nine months ended September 30, 2020, 37,337 shares vested. A total of 14,935 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of performance units during the nine months ended September 30, 2020 were 22,402 shares. As of September 30, 2020, compensation cost of approximately $1.1 million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.9 years.

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

			Weighted
			Average Grant
	Units		Date Fair
	(expected)		Value
Unearned as of December 31, 2019	73,069		$	23.62
Awarded	123,870			10.77
Vested shares	(27,626	)		24.53
Unearned as of September 30, 2020	169,313		$	14.07

Any forfeitures would result in previously recognized expense being reversed. A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient. During the nine months ended September 30, 2020, 27,626 shares vested. A total of 11,085 shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of restricted stock units during the nine months ended September 30, 2020 were 16,541 shares. As of September 30, 2020, compensation cost of approximately $1.8 million related to non-vested restricted stock units, not yet recognized, is expected to be recognized over a weighted-average period of 2.0 years.