12.EMPLOYEE BENEFIT PLANS

401(k) plan

The Bank provides a savings and retirement plan for employees, which qualifies under Section 401(k) of the Internal Revenue Code. All employees who have attained age 21 and have completed one year of employment during which they worked at least 1,000 hours are eligible to participate. The plan provides for voluntary contributions by participating employees ranging from 1% to 75% of their compensation, subject to certain limitations. In addition, the Bank will make a matching contribution, equal to 50% of the employee’s contribution. The Bank’s matching contribution will not exceed 3% of an employee’s salary. In addition, the Bank may make a discretionary contribution not to exceed 3% of an employee’s salary. For the years ended December 31, 2016 and 2015, expense attributable to the plan amounted to $152,000 and $146,000, respectively.

Incentive plan

The Bank has an Incentive Plan whereby all employees are eligible to receive a payment if the Bank or participant meets or exceeds certain base standards of performance for its fiscal year. The structure of the Incentive Plan is to be reviewed on an annual basis by the Board of Directors. Incentive compensation expense for the years ended December 31, 2016 and 2015 amounted to $130,000 and $167,000, respectively.

Executive supplemental retirement agreements

The Bank has entered into supplemental retirement agreements with certain executive officers, which provide for the payment of specified benefits upon retirement or early termination, as defined in the agreements. For the years ended December 31, 2016 and 2015, total expense applicable to these agreements amounted to $181,000 and $139,000, respectively. The recorded liability for these agreements was $1,713,000 and $1,532,000 at December 31, 2016 and 2015, respectively.

Employee Stock Ownership Plan

The Bank established an ESOP for the benefit of each employee who has reached the age of 21 and has completed at least one year of employment with the Bank. Benefits may be paid in shares of common stock or in cash, subject to the employees’ right to demand shares.

The ESOP has a loan agreement with the Company whereby $1,237,000 was borrowed for the purpose of purchasing shares of the Company’s common stock. At December 31, 2016, the loan has 10 remaining annual principal and interest payments of $104,000, all of which are due on the last business day of the respective year. The loan documents provide that the loan may be repaid over a shorter period, without penalty for prepayments.

The remaining principal balance on the ESOP debt at December 31, 2016, is payable as follows:


Years Ending
December 31,	Amount
	(In thousands)

2017	$	75
2018		78
2019		80
2020		83
2021		86
Thereafter		472

Total remaining principal balance on the ESOP debt	$	874

The Bank has committed to make contributions to the ESOP sufficient to support the debt service of the loan. The loan is secured by the shares purchased, which are held in a suspense account for allocation among the participants as the loan is paid. Total compensation expense applicable to the ESOP amounted to $155,000 and $132,000 for the years ended December 31, 2016 and 2015, respectively.

Shares held by the ESOP are as follows:


	At December 31,
	2016	2015

Allocated	82,451	74,624
Committed to be allocated	7,240	7,241
Unallocated	72,405	79,645
Paid out to participants	(18,787)	(18,709)

Total shares held by ESOP	143,309	142,801

Any cash dividends received on allocated shares would be used to purchase additional shares and then allocated to participants and cash dividends received on shares held in suspense would be used to reduce the Bank’s annual contribution to the ESOP. The fair value of unallocated ESOP shares at December 31, 2016 and 2015 is $1,872,000 and $1,507,000, respectively.

Share-based compensation plans

In accordance with the Company’s 2009 and 2014 Equity Incentive Plans, the Company awarded 33,500 stock options and 16,500 shares of restricted stock to eligible participants on February 22, 2016. The 2009 Plan provides for total awards of 180,035 shares of the Company’s common stock pursuant to grants of restricted stock awards, incentive stock options, non-qualified stock options and stock appreciation rights; provided, however, that shares of stock used to fund stock options greater than 98,000 shares must be obtained through stock repurchases and shares of stock used to fund restricted stock awards greater than 39,200 shares must be obtained through stock repurchases.

The 2014 Equity Incentive Plan provides for total awards of 154,000 shares of the Company’s common stock pursuant to grants of restricted stock awards, restricted stock unit awards, performance awards, incentive stock options and non-qualified stock options; provided, however, that no more than 44,000 shares of stock may be issued as restricted stock awards and restricted stock units, and no more than 110,000 shares may be issued or delivered in the aggregate pursuant to the exercise of stock options.

The exercise price of each option will be equal to or greater than the market price of the Company’s stock on the date of grant and the maximum term of each option is ten years. Vesting periods for options and restricted stock granted to directors and officers are three years and five years, respectively, from the date of grant.

The fair value of the stock options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:


	2016		2015

Expected dividends	0.98	%	0.97	%
Expected term	6.4	years	6.4	years
Expected volatility	32.95	%	34.97	%
Risk-free interest rate	1.47	%	1.82	%

The expected volatility is based on historical volatility. The risk-free interest rates for periods consistent with the expected term of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected term is determined using the average of the mathematical mean of the vesting period and the full term of the option rather than estimating based on historical experience. The dividend yield assumption is based on the Company’s history, expectation of future dividend payouts and market value at the date of grant.

The following tables present the activity for the 2009 and 2014 Plans as of and for the years ended December 31, 2016 and 2015:


	Stock Options
	2016				2015
			Weighted				Weighted
			Average				Average
	Number of		Exercise		Number of		Exercise
	Shares		Price		Shares		Price

Outstanding at beginning of year		89,275	$	14.02		61,681	$	12.13
Granted		33,500	$	19.40		30,000	$	17.55
Exercised		—	$	—		(1,198)	$	9.48
Cancelled		—	$	—		(1,208)	$	9.90

Outstanding at end of period		122,775	$	15.49		89,275	$	14.02

Exercisable at end of period		51,740				34,417

Aggregate intrinsic value of outstanding options at end of period	$	1,272,000			$	438,000

Weighted average fair value of options granted during the period	$	6.07			$	5.91


Options Outstanding					Options Exercisable
Number	Weighted-Average		Weighted		Number	Weighted
Outstanding	Remaining		Average		Exercisable	Average
as of 12/31/2016	Contractual Life		Exercise Price		as of 12/31/2016	Exercise Price

8,712	3.15	Years	$	9.33	8,712	$	9.33
9,683	4.15	Years	$	9.55	9,683	$	9.55
8,570	5.15	Years	$	9.58	7,359	$	9.58
15,200	6.15	Years	$	14.00	10,500	$	14.00
17,110	7.15	Years	$	14.98	8,286	$	14.98
30,000	8.15	Years	$	17.55	7,200	$	17.55
33,500	9.15	Years	$	19.40	—	$	—
122,775	7.15	Years	$	15.49	51,740	$	12.40


	Non-vested
	Restricted Stock
	2016			2015
		Weighted			Weighted
		Average			Average
	Number of	Grant Date		Number of	Grant Date
	Shares	Value		Shares	Value

Outstanding at beginning of year	44,866	$	15.21	37,071	$	12.85
Granted	16,500	$	19.40	20,000	$	17.55
Vested	(14,917)	$	14.27	(12,205)	$	11.89

Outstanding at end of period	46,449	$	17.00	44,866	$	15.21

As of December 31, 2016, unrecognized share-based compensation expense related to non-vested options amounted to $309,000 and the unrecognized share-based compensation expense related to non-vested restricted stock amounted to $574,000. The unrecognized expense related to the non-vested options and non-vested restricted stock will be recognized over a weighted average period of 3.1 and 3.0 years, respectively.

For the year ended December 31, 2016, the Company recognized compensation expense for stock options of $124,000 with a related tax benefit of $16,000. For the year ended December 31, 2016, the Company recognized compensation expense for restricted stock awards of $257,000, with a related tax benefit of $103,000. For the year ended December 31, 2015, the Company recognized compensation expense for stock options of $90,000 with a related tax benefit of $12,000. For the year ended December 31, 2015, the Company recognized compensation expense for restricted stock awards of $209,000, with a related tax benefit of $84,000.