Stock-Based Compensation Plans

Stock-Based Compensation

On April 29, 2003 and May 1, 2012, the shareholders of the Company approved the 2003 Plan and 2012 Plan, respectively. The maximum number of shares of stock reserved and available for issuance under each the 2003 Plan and 2012 Plan is 1.2 million shares. Awards may be granted in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, performance shares and dividend equivalent rights, or any combination of the preceding, and the exercise price shall not be less than 100% of the fair market value on the date of grant in the case of incentive stock options, or 85% of the fair market value on the date of grant in the case of non-qualified stock options. No stock options are exercisable more than ten years after the date the stock option is granted. The exercise price of all options granted equaled the market price of the Company's stock on the date of grant, except for the non-qualified stock options issued in conjunction with the Merger. Refer to Note 2 for additional details.

Stock Option Awards

Stock options granted under the 2003 Plan and the 2012 Plan have been both incentive stock options and non-qualified stock options. All incentive stock options and non-qualified stock options granted vest pro rata over a five year period and have a contractual life of ten years.

On the date of each grant, the fair value of each award is derived using the Black-Scholes option pricing model based on assumptions made by the Company as follows:


•	Dividend yield is based on the dividend rate of the Company’s stock at the date of grant.


•	Risk-free interest rate is based on the U.S. Treasury bond rate with a term equaling the expected life of the granted options.


•	Expected volatility is based on the historical volatility of the Company’s stock price calculated over the expected life of the option.


•	Expected life represents the period of time that granted options are expected to be outstanding based on historical trends.

The following table presents the option pricing assumptions and the estimated fair value of the options using these assumptions for grants made for the year ended:



	December 31,
	2016			2015			2014
Weighted-average dividend yield	3.12		%	3.01		%	2.90		%
Weighted-average risk-free interest rate	1.52		%	1.50		%	1.65		%
Weighted-average expected volatility	29.64		%	31.85		%	35.39		%
Weighted-average expected life (in years)	5.3			5.3			5.3
Weighted-average fair value of options granted	$	5.17		$	5.87		$	5.95

Compensation expense is recognized on a straight-line basis over the option vesting period. For the year ended December 31, 2016, 2015 and 2014, the Company issued only incentive stock options and the associated compensation expense recognized was $30,000, $51,000 and $81,000, respectively. The Company does not receive any tax benefit on its issuance of incentive stock options, unless upon exercise a disqualifying disposition is made. The total tax benefit to the Company upon exercise of incentive stock options for the year ended December 31, 2016, 2015 and 2014 was $36,000, $59,000, and $19,000, respectively. Additionally, for the year ended December 31, 2016, the Company received a tax benefit upon the exercise of non-qualified stock options that were issued as consideration in the Merger of $378,000.

Unrecognized compensation expense for nonvested stock options totaled $48,000 at December 31, 2016. Effective January 1, 2016, the Company early adopted ASU 2016-09 and made a policy election to not apply a forfeiture rate to account for its share-based compensation expense. This accounting policy change was applied retrospectively, the cumulative-effect of such adjustment for prior periods totaled $72,000 and was recorded within shareholders' equity for the year ended December 31, 2016. Unrecognized compensation expense on stock options is expected to be recognized over the remaining weighted-average vesting period of 3.1 years. The total intrinsic value of options exercised for the year ended December 31, 2016, 2015 and 2014 was $2.5 million, $573,000, and $134,000, respectively.

Stock option activity for the year ended December 31, 2016 is as follows:



	Number of Shares⁽¹⁾		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Options outstanding at January 1, 2016	219,399		$	16.93
Granted	3,000		25.64
Exercised	(157,956	)	15.53
Forfeited and expired	(5,700	)	22.93
Options outstanding at December 31, 2016	58,743		$	20.38	3.82	$	1,558
Options exercisable at December 31, 2016	49,293		$	19.62	3.91	$	1,224


(1)	Options outstanding at January 1, 2016 included 118,299 of non-qualified stock options issued in conjunction with the Merger. Of these, 109,356 were exercised during 2016. At December 31, 2016, 8,943 non-qualified stock options issued in conjunction with the Merger were outstanding and exercisable.

A summary of the status of the Company’s nonvested stock options as of December 31, 2016 and changes during the year then ended is presented below:



	Awards		Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2016	17,351		$	7.40
Granted	3,000		5.17
Vested	(7,751	)	8.13
Forfeited	(3,150	)	5.92
Nonvested at December 31, 2016	9,450		$	6.59

For the year ended December 31, 2016 and 2015, the Company received cash from the exercise of stock options of $1.3 million and $736,000, respectively.

Restricted Stock, Restricted Stock Units and MSPP

The Company issued restricted stock awards to certain executives, directors, and employees. Restricted stock awards are issued to certain employees and vest pro-rata over the requisite service period, which is typically three or five years, and may contain certain performance-based conditions. The vesting period for restricted stock awards issued to directors under the Independent Directors' Equity Compensation Program is determined when granted. Restricted stock awards issued to directors and employees participate in dividends and recipients are entitled to vote these restricted shares during the vesting period.

The Company issued restricted stock units to certain Company directors who make a valid election to defer under the Independent Directors' Equity Compensation Program, a component of the 2012 Plan. These units are deferred and have no voting or dividend rights until termination or retirement, at which time shares will be issued based on the grant date fair value of the awards issued. The vesting period for these awards is determined when granted. The Company did not issue restricted stock units to directors under the Independent Directors' Equity Compensation Program for the year ended December 31, 2016.

The Company offers the MSPP to provide an opportunity for certain executives and employees to receive restricted shares of the Company’s common stock in lieu of their annual incentive bonus. Restricted shares issued under the MSPP are granted at a discount of one-third of the fair market value of the stock on the date of grant and cliff vests two years after the grant date. Restricted stock issued under the MSPP to executives and employees participate in dividends and are entitled to vote these restricted shares during the vesting period.

Compensation expense recognized in connection with the restricted stock units, restricted stock awards, and MSPP is presented in the following table:



	For The Year Ended December 31,
	2016		2015		2014
Restricted stock and restricted stock units	$	703	$	327	$	254
MSPP	102		66		67
Total compensation expense	$	805	$	393	$	321
Related income tax benefit	$	282	$	137	$	112
Fair value of grants vested	$	660	$	433	$	332

The following table presents a summary of the activity related to restricted stock, restricted stock units and MSPP for the period indicated:



	Restricted Stock and Restricted Stock Units				MSPP
	Number of Shares		Weighted-Average Grant Date Fair Value		Number of Shares		Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2016	38,391		$	27.09	18,800		$	7.85
Granted	32,016		28.88		16,000		8.02
Vested	(22,000	)	27.40		(6,988	)	8.21
Forfeited	(894	)	26.55		(1,113	)	8.10
Nonvested at December 31, 2016	47,513		$	28.16	26,699		$	7.85

At December 31, 2016, unrecognized compensation cost related to nonvested restricted stock awards and MSPP was $1.1 million, which is expected to be recognized over a weighted-average period of 2.6 years.

LTIP

The LTIP is intended to attract and retain executives who will contribute to the Company’s future success. The long-term performance period is a period of three consecutive years beginning on January 1 of the first year and ending on December 31 of the third year. Awards are based upon either: (i) the attainment of certain performance targets on specific performance measures selected by the Compensation Committee and approved by the Board of Directors; or (ii) 50% weighted on the attainment of certain performance targets on specific performance measures selected by the Compensation Committee and approved by the Board of Directors and 50% weighted on meeting the requisite service period. The performance-based share units granted will vest only if specific performance measures, as defined under the LTIP, are achieved. Failure to achieve the specific performance measures will result in all or a portion of the shares being forfeited. The service-based share units granted vest annually pro-rata over the three year period.

Compensation expense recognized in connection with the LTIP is presented in the following table:



	For The Year Ended December 31,
	2016		2015		2014
Compensation expense⁽¹⁾	$	1,080	$	330	$	151
Related income tax benefit	$	378	$	116	$	53
Fair value of grants vested	$	725	$	412	$	—


(1)	For the year ended December 31, 2016, $84,000 of compensation expense associated with the LTIP for the plan year January 1, 2016 to December 31, 2018 was accounted for within total compensation expense for restricted stock and restricted stock units above as this plan contains both performance- and service-based conditions.

The following table presents a summary of the activity related to LTIP for the period indicated:



	Number of Shares		Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2016	64,165		$	26.71
Granted	17,385		28.87
Vested	(26,396	)	27.45
Forfeited	(2,417	)	27.45
Nonvested at December 31, 2016	52,737		$	27.01

Based on current performance levels, unrecognized stock compensation expense for the performance share awards was $417,000 with a weighted-average remaining amortization period of 1.4 years at December 31, 2016.

DCRP

The DCRP is an unfunded deferred compensation plan for the benefit of certain Company executives. The Company’s Compensation Committee determines eligibility in the DCRP and annually, participants will receive a credit to an account administered by the Company of 10% of each participant’s annual base salary and bonus for the prior performance period. Annual credits to a participant’s account will be denominated in deferred stock awards (the right to receive a share of common stock of the Company upon the satisfaction of certain restrictions) based on the fair market value of the common stock of the Company on the date of grant. Vesting occurs ratably from the date of participation until the participant reaches the age of 65, at which time the participant is 100% vested. Upon retirement or termination of employment, the participant will receive shares of common stock equal to the Deferred Stock Awards in the account multiplied by the vested percentage, reduced by the amount to be withheld for income taxes. The Company granted 4,094, 3,609, and 3,030 of deferred stock awards for the years ended December 31, 2016, 2015 and 2014, respectively under the DCRP. Compensation expense totaled $81,000, $62,000, and $46,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Unrecognized stock compensation expense for the deferred stock awards was $308,000 with a weighted-average remaining amortization period of 10.4 years at December 31, 2016.