Note 10 – Stock-based Compensation

Stock Options and Restricted Stock

The Company currently has two existing Equity Incentive Plans, a 2008 Equity Inventive Plan (the"2008 Plan") and a 2013 Equity Incentive Plan (the "2013 Plan" and together with the 2008 Plan, the "Plans"), both of which were approved by shareholders. The Plans permit the grant of restricted stock, restricted stock units, stock options, and stock appreciation rights. Under the 2008 Plan, 126,287 shares of common stock were approved for awards for stock options and stock appreciation rights and 50,514 shares of common stock were approved for awards for restricted stock and restricted stock units. Under the 2013 Plan, 141,750 shares of common stock were approved for awards for stock options and stock appreciation rights and 56,700 shares of common stock were approved for awards for restricted stock and restricted stock units.

As of September 30, 2016, awards for stock options totaling 233,532 shares and awards for restricted stock totaling 106,630 shares of Company common stock have been granted, net of any forfeitures, to participants in the Plans. During the three months ended September 30, 2016 and September 30, 2015, share-based compensation expense totaled $126,000 and $115,000, respectively. During the nine months ended September 30, 2016 and September 30, 2015, share-based compensation expense totaled $354,000 and $322,000, respectively.

Stock Option Awards

The stock option awards granted to date under the 2008 Plan vest in 20 percent annual increments commencing one year from the grant date in accordance with the requirements of the 2008 Plan. The stock option awards granted to date under the 2013 Plan vest in equal annual installments over two to four years. All of the options granted are exercisable for a period of 10 years from the date of grant, subject to vesting. The following is a summary of the Company's stock option awards during the nine months ended September 30, 2016:

	Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term In Years	Aggregate Intrinsic Value
Outstanding at the beginning of the year		184,407		$	14.47	6.97	$	1,490,009
Granted		10,993		$	22.31
Exercised		(21,656	)	$	10.68
Forfeited		(3,487	)	$	17.23
Expired		-			-
Outstanding at September 30, 2016		170,257		$	15.40	6.69	$	1,545,296
Exercisable		90,193		$	13.67	5.80	$	974,685
Expected to vest, assuming a 0% forfeiture rate over the vesting term		80,064		$	17.35	7.70	$	570,610

As of September 30, 2016, there was $378,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plans. The cost is expected to be recognized over the remaining weighted-average vesting period of 2.5 years.

The fair value of each option award granted is estimated on the date of grant using a Black-Scholes model. The assumptions used for the nine months ended September 30, 2016 are presented in the table below:

Annual dividend yield		1.03	%
Expected volatility		25.48	%
Risk-free interest rate		1.64	%
Expected term	6.92		years
Weighted-average grant date fair value per option granted	$	5.78

Restricted Stock Awards

The fair value of the restricted stock awards is equal to the fair value of the Company’s stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. The restricted stock awards granted under the 2008 Plan vest in 20 percent annual increments commencing one year from the grant date in accordance with the requirements of the 2008 plan. The restricted stock awards granted to date under the 2013 Plan vest in equal annual installments over two to four years.

The following is a summary of the Company’s outstanding restricted stock awards during the nine months ended September 30, 2016:

Non-vested Shares	Shares			Weighted-Average Grant-Date Fair Value Per Share
Non-vested at January 1, 2016		31,553		$	16.32
Granted		11,606			22.31
Vested		(15,962	)		17.59
Forfeited		(1,059	)		17.36
Expired		-			-
Non-vested at September 30, 2016		26,138		$	18.08
Expected to vest assuming a 0% forfeiture rate over the vesting term		26,138		$	18.08

As of September 30, 2016, there was $408,000 of total unrecognized compensation cost related to non-vested restricted stock granted under the Plans. The cost is expected to be recognized over the weighted-average vesting period of 1.28 years. The total fair value of shares vested for the nine months ended September 30, 2016 and 2015 was $272,000 and $240,000, respectively.

Employee Stock Ownership Plan

In January 2008, the ESOP borrowed $1.2 million from the Company to purchase common stock of the Company. In August 2012, in conjunction with the Company’s “second step” conversion to become a fully converted public company, the ESOP borrowed $1.1 million from the Company to purchase additional common stock of the Company. Both loans are being repaid principally by the Bank through contributions to the ESOP over a period of ten years. The interest rate on the loans is fixed at 4.0% and 2.25%, per annum, respectively. As of September 30, 2016, the remaining balances of the ESOP loans were $270,000 and $701,000, respectively.

Neither the loan balances nor the related interest expense are reflected on the condensed consolidated financial statements.

At September 30, 2016, the ESOP was committed to release 21,443 shares of the Company’s common stock to participants and held 88,243 unallocated shares remaining to be released in future years. The fair value of the 188,981 shares of Company common stock held by the ESOP trust was $4.5 million at September 30, 2016. ESOP compensation expense included in salaries and benefits was $155,000 and $426,000 for the three and nine months ended September 30, 2016 and $110,000 and $313,000 for the three and nine months ended September 30, 2015, respectively.