10.STOCK PLANS

The Company has two stock-based compensation plans (the stock compensation plans) from which it can grant stock-based compensation awards and applies the fair value method of accounting for stock-based compensation provided under current accounting guidance. The guidelines require the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements. The Company’s stock compensation plans were shareholder-approved and permit the grant of share-based compensation awards to its employees and directors. The Company believes that the stock-based compensation plans will advance the development, growth and financial condition of the Company by providing incentives through participation in the appreciation in the value of the Company’s common stock. In return, the Company hopes to secure, retain and motivate the employees and directors who are responsible for the operation and the management of the affairs of the Company by aligning the interest of its employees and directors with the interest of its shareholders. In the stock compensation plans, employees and directors are eligible to be awarded stock-based compensation grants which can consist of stock options (qualified and non-qualified), stock appreciation rights (SARs) and restricted stock.

At the 2012 annual shareholders’ meeting, the Company’s shareholders approved and the Company adopted the 2012 Omnibus Stock Incentive Plan and the 2012 Director Stock Incentive Plan (collectively, the 2012 stock incentive plans). The 2012 stock incentive plans replaced both the expired 2000 Independent Directors Stock Option Plan and the 2000 Stock Incentive Plan (collectively, the 2000 stock incentive plans). Unless terminated by the Company’s board of directors, the 2012 stock incentive plans will expire on and no stock-based awards shall be granted after the year 2022.

In each of the 2012 stock incentive plans, the Company has reserved 750,000 shares of its no-par common stock for future issuance. The Company recognizes share-based compensation expense over the requisite service or vesting period. During 2015, the Company created a Long-Term Incentive Plan (LTIP) that awarded restricted stock and stock-settled stock appreciation rights (SSARs) to senior officers based on the attainment of performance goals. The service requirement is the participant’s continued employment throughout the LTIP with a three-year vesting period. The restricted stock has a two-year post vesting holding period requirement. The SSAR awards have a ten-year term from the date of each grant. The Company granted restricted stock and SSARs in February 2016 based on 2015 performance, in February 2017 based on 2016 performance and in February 2018 based on 2017 performance and 2015-2017 3-year cumulative performance. During the first quarter of 2019, the Company approved a 1 year LTIP and awarded restricted stock and SSARs to senior officers and managers in February 2019 based on 2018 performance.

The following table summarizes the weighted-average fair value and vesting of restricted stock grants awarded during 2019, 2018 and 2017 under the 2012 stock incentive plans:



	2019				2018				2017
			Weighted-				Weighted-				Weighted-
			average				average				average
	Shares		grant date		Shares		grant date		Shares		grant date
	granted		fair value		granted		fair value		granted		fair value

Director plan	5,600	(3)	$	54.69	8,400	(3)	$	49.50	8,400	(2)	$	26.17
Omnibus plan	7,251	(3)		54.69	10,800	(3)		45.83	4,749	(3)		23.93
Omnibus plan	50	(1)		58.08	50	(1)		49.50	75	(1)		26.17
Total	12,901		$	54.70	19,250		$	47.44	13,224		$	25.36

⁽¹⁾

Vest after 1 year (2) Vest over 2 years –50% each year (3) Vest over 3 years – 33% each year

The fair value of the 5,600 and 7,251 shares granted on February 5, 2019 was calculated using the grant date stock price with a discount valuation. The Chaffe model was used to calculate the discount. Since the shares vest over three years and then have a further two-year holding period, the historical volatility of the five years prior to the issue date was used to estimate volatility. The five-year treasury yield was used as the interest rate. The Company does pay a dividend, but since the shareholder will receive the dividends during vesting and the post-vest restriction period, no dividend yield was used in the calculation as not to inflate the discount. The grant date stock price was $59.70 and the discount of 8.393% was calculated using an interest rate of 2.494% and a 5-year historical volatility of 19.411%.

A summary of the status of the Company’s non-vested restricted stock as of and changes during the period indicated are presented in the following table:



	2012 Stock incentive plans
	Director	Omnibus	Total		Weighted- average grant date fair value
Non-vested balance at December 31, 2016	8,400	13,562	21,962	$	20.31
Granted	8,400	4,824	13,224		25.36
Forfeited	-	-	-
Vested	(8,400)	(6,082)	(14,482)		20.47
Non-vested balance at December 31, 2017	8,400	12,304	20,704	$	23.59
Granted	8,400	10,850	19,250		47.44
Forfeited	-	-	-
Vested	(4,200)	(5,794)	(9,994)		23.69
Non-vested balance at December 31, 2018	12,600	17,360	29,960	$	38.99
Granted	5,600	7,301	12,901		54.70
Forfeited	-	(126)	(126)		54.69
Vested	(7,000)	(8,574)	(15,574)		33.81
Non-vested balance at December 31, 2019	11,200	15,961	27,161	$	49.48

The Company granted 11,073 SSARs under the Omnibus Plan on February 5, 2019. The Company estimated the fair value of SSARs using the Black-Scholes-Merton valuation model on the grant date. The Company used the following assumptions: the risk-free interest rate is the rate equivalent to the expected term of the option interpolated from the U.S. Treasury Yield Curve on the valuation date and historical volatility is calculated by taking the standard deviation of historical returns using weekly and monthly data. The fair value of these SSARs was $16.79 per share, based on a risk-free interest rate of 2.692%, a dividend yield of 1.628% and a volatility of 23.732% using an expected term of ten years.

A summary of the status of the Company’s SSARs as of and changes during the period indicated are presented in the following table:



	Awards		Weighted-average grant date fair value	Weighted-average remaining contractual term (years)
Outstanding December 31, 2016	29,014	$	3.48	9.1
Granted	24,346		5.06	10.0
Exercised	-		-
Forfeited	-		-
Outstanding December 31, 2017	53,360	$	4.20	8.5
Granted	38,941		13.73	10.0
Exercised	(3,051)		4.03
Forfeited	-		-
Outstanding December 31, 2018	89,250	$	8.36	8.2
Granted	11,073		16.79	10.0
Exercised	(3,059)		3.48
Forfeited	-		-
Outstanding December 31, 2019	97,264	$	9.47	7.5

Of the SSARs outstanding at December 31, 2019, 52,112 vested and were exercisable. SSARs vest over a three year period – 33% per year.

During 2019, there were 3,059 SSARs exercised. The intrinsic value recorded for these SSARs was $10,631. The tax deduction realized from the exercise of these SSARs was $108,134 resulting in a tax benefit of $22,708. During 2018, there were 3,051 SSARs exercised. The intrinsic value recorded for these SSARs was $12,288. The tax deduction realized from the exercise of these SSARs was $122,969 resulting in a tax benefit of $25,823.

Share-based compensation expense is included as a component of salaries and employee benefits in the consolidated statements of income. The following tables illustrate stock-based compensation expense recognized on non-vested equity awards during the years ended December 31, 2019, 2018 and 2017 and the unrecognized stock-based compensation expense as of December 31, 2019:




(dollars in thousands)	2019		2018		2017
Stock-based compensation expense:
Director stock incentive plan	$	240	$	237	$	116
Omnibus stock incentive plan		611		500		194
Employee stock purchase plan		107		143		23
Total stock-based compensation expense	$	958	$	880	$	333

In addition, during 2019, 2018 and 2017 the Company reversed accruals of ($0.1 million), ($0.1 million) and accrued $0.2 million in stock-based compensation expense for restricted stock and SSARs to be awarded under the Omnibus Plan.


	As of
(dollars in thousands)	December 31, 2019
Unrecognized stock-based compensation expense:
Director plan	$	364
Omnibus plan		781
Total unrecognized stock-based compensation expense	$	1,145

The unrecognized stock-based compensation expense as of December 31, 2019 will be recognized ratably over the periods ended January 2022 and January 2022 for the Director Plan and the Omnibus Plan, respectively.

Transactions under the Company’s stock option plans as of and changes during the periods indicated are presented in the following table:



	Options		Weighted-average exercise price	Weighted-average remaining contractual term (years)
Outstanding and exercisable, December 31, 2016	22,500	$	19.12	1.0
Granted	-		-
Exercised	(21,750)		19.14
Forfeited	-		-
Outstanding and exercisable, December 31, 2017	750	$	18.50	0.2
Granted	-		-
Exercised	(750)		18.50
Forfeited	-		-
Outstanding and exercisable, December 31, 2018	-	$	-	-

During the first quarter of 2018, there were 750 stock options exercised at a price of $18.50 per share. The intrinsic value of these stock options was $2,585. The tax deduction realized from the exercise of these options was $22,875 resulting in a tax benefit of $4,804. During 2017, there were 21,750 stock options exercised at a price of $19.14 per share. The intrinsic value of these stock options was $79,715. The tax deduction realized from the exercise of these options was $363,392 resulting in a tax benefit of $123,553. As of December 31, 2019, there were no stock options outstanding.

In addition to the 2012 stock incentive plans, the Company established the 2002 Employee Stock Purchase Plan (the ESPP) and reserved 165,000 shares of its un-issued capital stock for issuance under the plan. The ESPP was designed to promote broad-based employee ownership of the Company’s stock and to motivate employees to improve job performance and enhance the financial results of the Company. Under the ESPP, participation is voluntary whereby employees use automatic payroll withholdings to purchase the Company’s capital stock at a discounted price based on the fair market value of the capital stock as measured on either the commencement or termination dates, as defined. As of December 31, 2019, 81,019 shares have been issued under the ESPP. The ESPP is considered a compensatory plan and is required to comply with the provisions of current accounting guidance. The Company recognizes compensation expense on its ESPP on the date the shares are purchased, and it is included as a component of salaries and employee benefits in the consolidated statements of income.

The Company also established the dividend reinvestment plan (the DRP) for its shareholders. The DRP is designed to avail the Company’s stock at no transactional cost to its shareholders. Cash dividends paid to shareholders who are enrolled in the DRP plus voluntary cash deposits received can be used to purchase shares, directly from the Company, from shares that become available in the open market or in negotiated transactions with third parties. The Company has reserved 750,000 shares of its un-issued capital stock for issuance under the DRP. As of December 31, 2019, there were 591,730 shares available for future issuance.