Note 13. Share-based Compensation Plans

As of December 31, 2016, the Company had one active share-based employee compensation plan, which was approved by the Company's shareholders in May 2015. This plan, referred to as the "2015 Equity Incentive Plan," authorizes the Company to grant various types of share-based compensation awards to the Company's employees and Board of Directors such as stock options, restricted stock awards, and restricted stock units. Under the 2015 Equity Incentive Plan a maximum of 2,500,000 shares of the Company's common stock may be issued. Shares issued under this plan, other than stock options and stock appreciation rights, are counted against the plan on a two shares for every one share actually issued basis. Awards that are cancelled, expired, forfeited, fail to vest, or otherwise result in issued shares not being delivered to the grantee, are again made available for the issuance of future share-based compensation awards. Additionally, under this plan, no one individual may be granted shares in aggregate that exceed more than 250,000 shares during any calendar year. The Company's Board of Directors may terminate the 2015 Equity Incentive Plan at any time, and for any reason before the plan expires on December 3, 2024.

The Company also has one non-active share-based compensation plan. This plan is referred to as the "2005 Equity Based Compensation Plan." As of December 31, 2016, no further grants can be made from this plan.

Restricted Stock Awards

The Company grants restricted stock periodically for the benefit of employees and to the members of the Board of Directors. Restricted stock awards typically vest ratably over a period of three to five years depending on the specific terms of the award. Restricted stock awards may be subject to the achievement of certain performance goals. Compensation costs related to restricted stock awards are recognized over the period the awards are expected to vest and are included in salaries and employee benefits. Compensation cost related to awards that are subject to performance conditions is recognized over the vesting period if the Company believes it is more likely than not that the performance conditions will be achieved. If the Company believes it is more likely than not that performance conditions will not be achieved, the Company ceases the accrual of compensation cost for the related award, and previously recognized compensation cost for the unvested portion of the award is reversed from earnings. The Company includes a forfeiture rate assumption in its accrual for compensation cost associated with restricted stock awards, which is based on the Company's historical experience with such awards.

The following table provides a summary of activity related to restricted stock awards granted for the year ended December 31, 2016:

	Number of Shares			Average Grant Date Fair Value
Balance December 31, 2015		162,394		$	7.30
Granted		120,818			7.85
Vested		(76,928	)		7.39
Forfeited		(17,765	)		7.76

Balance December 31, 2016		188,519		$	7.59


Expected to vest as of December 31, 2016		175,479		$	7.57

Included in the table above are performance-based grants of restricted stock totaling 13,245 shares as of December 31, 2016.

Restricted Stock Units

Restricted stock units are granted periodically for the benefit of employees. Upon vesting, certain of these awards settle in shares of the Company's common stock, while others settle in cash. Awards that settle in shares of the Company's common stock are made to executive officers, while those that settle in cash are made to other officers of the Bank. The Company recognizes compensation cost associated with restricted stock units that settle in shares of the Company's common stock through charges to current period earnings, included in salaries and employee benefits, and a corresponding increase in additional paid in capital. Compensation cost for these awards is recognized ratably over the period in which the awards are expected to vest. For restricted stock units that settle in cash, the Company accrues a liability for the ultimate settlement of the award through charges to current period earnings, included in salaries and employee benefits. Compensation cost for these awards is recognized ratably over the period in which the awards are expected to vest. However, the ultimate settlement value of these awards and the related compensation cost may fluctuate, based on increases and decreases in the value of the Company's common stock over the vesting period.

Restricted stock units that settle in shares of the Company's common stock have vesting conditions which are based on pre-determined performance targets. Based on the achievement of these performance targets, the number of awards that vest can be adjusted upward to a maximum of 150% of the granted amount or downward to zero. Certain of the Company's performance based restricted stock units have performance targets based on the Company's return on average assets and total shareholder return over a specified period of time, relative to the Company's pre-determined peer group.

The grant date fair value of performance based restricted stock units that do not contain a market condition, such as those where vesting is based on return on average assets, is equivalent to the price of the Company's common stock on the date of grant. The Company incorporates a forfeiture rate assumption in its accrual for compensation cost for these awards, which is based on the Company's historical experience with similar awards. For awards that contain a market condition, the Company employs the use of a Monte Carlo simulation through an independent party to determine the grant date fair value of those awards. The Monte Carlo simulation estimates the grant date fair value of these awards using input assumptions similar to those in the Black-Scholes model, however it also incorporates into the grant date fair value calculation the probability that the performance targets will or will not be achieved.

The grant date fair value for restricted stock units that settle in cash is equivalent to the price of the Company's common stock on the date of grant.

The following table provides a summary of activity related to restricted stock units that settle in shares of the Company's common stock for the year ended December 31, 2016:

	Settle in Stock
	Shares			Average Grant Date Fair Value
Balance, December 31, 2015		–		$	–
Granted		38,104			7.56
Forfeited		(1,388	)		7.56

Balance, December 31, 2016		36,716		$	7.56


Expected to vest as of December 31, 2016		25,719		$	7.56

The following table provides a summary of activity related to restricted stock units that settle in cash for the year ended December 31, 2016:

	Settle in Cash
	Shares			Fair Value (1)
Balance, December 31, 2015		–
Granted		81,696
Forfeited		(3,205	)

Balance, December 31, 2016		78,491		$	12.33


Expected to vest as of December 31, 2016		64,966		$	12.33

(1)

Represents the closing share price of the Company's common stock as of December 31, 2016. As of December 31, 2016, the accrued liability for restricted stock units expected to vest that settle in cash was approximately $0.2 million.

Stock Options

Stock options are granted periodically for the benefit of employees. The fair value of each stock option award is determined on the date of grant using the Black-Scholes option valuation model, which uses assumptions such as expected volatility of the Company's common stock, expected term of the option, expected dividend yield on the Company's common stock, and the expected risk free rate of interest. Expectations for volatility are based on the historical volatility of the Company's common stock. The Company estimates forfeiture rates based on historical option exercise and termination experience for its employees. The Company recognizes share-based compensation costs ratably over the vesting period of the award, which is typically a period of three to five years.

The following table provides a summary of activity related to stock options as well as information related to stock options that have vested or are expected to vest and exercisable as of and for the year ended December 31, 2016:

	Options Outstanding
	Number of Shares			Weighted Average Exercise Price		Average Remaining Life (years)		Average Intrinsic Value
Balance, December 31, 2015		932,553		$	7.19
Granted		36,022			7.27
Forfeited		(56,484	)		7.36
Exercised		(115,176	)		7.17

Balance, December 31, 2016		796,915		$	7.19		6.73	$	4,189,266


Exercisable December 31, 2016		416,829		$	6.93		5.44	$	2,342,931
Vested and expected to vest as of December 31, 2016		774,424		$	7.18		6.68	$	4,080,984

The total intrinsic value, the amount by which the stock price exceeded the exercise price on the date of exercise, of options exercised in all plans during the years ended December 31, 2016, 2015, and 2014 was $0.5 million, $0.2 million and $0.2 million, respectively. The tax benefit related to the exercise of stock options and disqualifying dispositions on the exercise of incentive stock options was $0.1 million and $0.1 million for the years ended December 31, 2016 and 2015. Tax benefits recognized on the exercise of options and disqualifying dispositions were not material for the year ended December 31, 2014.

The following table presents the assumptions used in the calculation of the weighted average fair value of options granted at various dates during the years ended December 31, 2016, 2015 and 2014:

	For the Years Ended December 31,
	2016		2015		2014
Expected volatility		31.85%		36.27%		49.38%
Expected term (years)		5.00		5.00		5.61
Dividend yield		3.30%		2.82%		0.67%
Risk free rate		1.31%		1.54%		1.75%

Weighted-average grant date fair value	$	1.50	$	1.97	$	3.32

Share-Based Compensation Expense

The following table provides a summary of the expense the Company recognized related to share-based compensation awards, as well as the remaining expense associated with those awards as of and for the years ended December 31, 2016, 2015 and 2014:

	For the Years Ended December 31,
	2016		2015		2014
		(dollars in thousands)
Compensation expense:
Stock options	$	416	$	506	$	490
Restricted stock awards		674		586		503
Restricted stock units (1)		272		–		–

Total	$	1,362	$	1,092	$	993


Unrecognized compensation expense:
Stock options	$	564	$	963	$	1,065
Restricted stock awards		834		799		967
Restricted stock units		724		–		–

Total	$	2,122	$	1,762	$	2,032

(1)

For the year ended December 31, 2016, expense for restricted stock units consisted of $224 thousand for restricted stock units that settle in cash, and $48 thousand for restricted stock units that settle in shares of the Company's common stock. The Company recorded no expense for restricted stock units for the years ended December 31, 2015 and 2014.

At December 31, 2016, compensation expense related to unvested stock options, restricted stock awards and restricted stock units is expected to be recognized over 2.0 years, 1.7 years and 2.3 years respectively.