NOTE 19 - STOCK-BASED COMPENSATION

Stock Options and Restricted Stock

On May 17, 2018, the shareholders of FS Bancorp, Inc. approved the 2018 Equity Incentive Plan (the “2018 Plan”) that authorizes 650,000 shares of the Company’s common stock to be awarded. The 2018 Plan provides for the grant of incentive stock options, non-qualified stock options, and up to 163,000 restricted stock awards (“RSAs”) to directors, emeritus directors, officers, employees or advisory directors of the Company. On August 15, 2019, the Company awarded grants of 20,215 RSAs and 50,655 stock options with an exercise price equal to the market price of FS Bancorp’s common stock on the grant date of $48.74 per share. On August 15, 2018, the Company awarded grants of 25,000 RSAs and 100,000 stock options with an exercise price equal to the market price of FS Bancorp’s common stock at the grant date of $58.60 per share.

In September 2013, the shareholders of FS Bancorp, Inc. approved the FS Bancorp, Inc. 2013 Equity Incentive Plan (the “2013 Plan”). The Plan provides for the grant of stock options and RSAs. The 2013 Plan authorizes the grant of stock options totaling 324,013 shares of common stock to Company directors and employees of which 322,000 stock options were granted with an exercise price equal to the market price of FS Bancorp’s common stock at the grant date of May 8, 2014, of $16.89 per share. The 2013 Plan authorizes the grant of RSAs totaling 129,605 shares to Company directors, advisory directors, emeritus directors, officers, and employees, and 125,105 shares were granted on May 8, 2014 at a grant date fair value of $16.89 per share. The remaining 4,500 RSAs were granted January 1, 2016 at a grant date fair value of $26.00 per share. All options and RSAs previously granted have vested as of December 31, 2019.

Total share-based compensation expense for both plans was $869,000 for the year ended December 31, 2019, and $767,000 for the year ended December 31, 2018. The related income tax benefit was $182,000 and $161,000 for the years ended December 31, 2019 and 2018, respectively.

Stock Options

Both plans consist of stock option awards that may be granted as incentive stock options or non-qualified stock options. Stock option awards generally vest at one year for independent directors or over five years for employees and officers with 20% vesting on the anniversary date of each grant date as long as the award recipient remains in service to the Company. The options are exercisable after vesting for up to the remaining term of the original grant. The maximum term of the options granted is 10 years. Any unexercised stock options will expire 10 years after the grant date or sooner in the event of the award recipient’s termination of service with the Company or the Bank. At December 31, 2019, there were 336,345 and 6,013 stock option awards available to be granted under the 2018 Plan and the 2013 Plan, respectively.

The fair value of each stock option award is estimated on the grant date using a Black-Scholes Option pricing model that uses the following assumptions. The dividend yield is based on the current quarterly dividend in effect at the time of the grant. Historical employment data is used to estimate the forfeiture rate. The Company elected to use Staff Accounting Bulletin 107, simplified expected term calculation for the “Share-Based Payments” method permitted by the SEC to calculate the expected term. This method uses the vesting term of an option along with the contractual term, setting the expected life at 5.5 years for one-year vesting and 6.5 years for five-year vesting.

The fair value of options granted was determined using the following weighted-average assumptions as of the grant date for the years ended December 31, 2019 and 2018.


	Year Ended December 31,		Year Ended December 31,
	2019		2018
Dividend yield		1.23%		0.95%
Expected volatility		18.90%		18.80%
Risk-free interest rate		1.45%		2.77%
Expected term in years		6.5		6.5
Weighted-average grant date fair value per option granted	$	8.80	$	13.22

The following table presents a summary of the Company’s stock option plan awards during the year ended December 31, 2019 (shown as actual):


				Weighted-Average
		Weighted-		Remaining
		Average		Contractual Term In	Aggregate
	Shares	Exercise Price		Years	Intrinsic Value
Outstanding at January 1, 2019	290,104	$	31.27	6.83	$	4,940,803
Granted	50,655		48.74	—		—
Less exercised	52,769	$	16.89	—	$	1,799,754
Forfeited or expired	—		—	—		—
Outstanding at December 31, 2019	287,990	$	36.98	6.77	$	7,722,369

Expected to vest, assuming a 0.31% annual forfeiture rate (1)	287,067	$	36.92	6.76	$	7,713,673

Exercisable at December 31, 2019	157,335	$	22.19	4.90	$	6,544,812

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(1) Forfeiture rate has been calculated and estimated to assume a forfeiture of 3.1% of the options forfeited over 10 years.

At December 31, 2019, there was $1.4 million of total unrecognized compensation cost related to nonvested stock options granted under both plans. The cost is expected to be recognized over the remaining weighted-average vesting period of 3.9 years.

Restricted Stock Awards

The RSAs’ fair value is equal to the value of the stock based on the market price of FS Bancorp’s common stock on the grant date and compensation expense is recognized over the vesting period of the awards based on the fair value of the restricted stock. Shares in the 2013 Plan awarded as restricted stock generally vested over a three-year period for directors and a five-year period for employees, beginning at the grant date. Shares for the 2018 Plan, shares generally vest at one year for independent directors or over a five-year period for employees and officers beginning on the grant date. Any unvested RSAs will expire after vesting or sooner in the event of the award recipient’s termination of service with the Company or the Bank.

The following table presents a summary of the Company’s nonvested awards during the year ended December 31, 2019 (shown as actual):


		Weighted-Average
		Grant-Date Fair Value
Nonvested Shares	Shares	Per Share
Nonvested at January 1, 2019	43,421	$	41.22
Granted	20,215	$	48.74
Less vested	23,421	$	26.38
Forfeited or expired	—		—
Nonvested at December 31, 2019	40,215	$	53.64

At December 31, 2019, there was $2.0 million of total unrecognized compensation costs related to nonvested shares granted under both plans as RSAs. The cost is expected to be recognized over the remaining weighted-average vesting period of 4.0 years. The total fair value of shares vested for the years ended December 31, 2019 and 2018 was $1.2 million and $1.1 million, respectively.