Note

– Stock Based Compensation –

Equity Incentive Plan

The Company previously granted options to its employees under its

2006

Stock Option Plan which expired on

December 22, 2016.

June 29, 2017,

the Company’s shareholders approved its

2017

Equity Incentive Plan (the “Plan”). The Plan provides for the grant of various types of equity grants and awards, including incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares and other stock-based awards to eligible participants, which includes the Company’s employees, directors and consultants. The Plan has reserved

500,000

shares of common stock for grant, award or issuance to eligible participants, all of which

may

be subject to incentive stock option treatment. The Plan is administered by the Compensation Committee of the Company’s Board of Directors, which determines, within the provisions of the Plan, those eligible participants to whom, and the times at which, grants and awards will be made. As of

December 31, 2019,

93,525

awards have been granted under the Plan, and

406,475

shares of common stock remain available for grant.

Restricted Stock Awards

The Company issues restricted stock under various plans for certain officers and other key employees. The restricted stock awards

may

not

be sold or otherwise transferred until certain restrictions have lapsed. The holders of the restricted stock receive dividends and have full voting rights with respect to those shares as of the date of grant. The compensation expense for these awards is determined based upon the market value of the Company’s common stock at the grant date applied to the total number of shares awarded and is recognized over the requisite service period.

During the years ended

December 31, 2019,

2018

and

2017,

the Company issued shares of restricted stock which vest in

three

equal installments over the requisite service period. For the years ended

December 31, 2019,

2018

and

2017,

respectively, the Company recognized

$1.0

million,

$766,000

and

$129,000

in compensation costs related to restricted stock awards. At

December 31, 2019,

2018

and

2017,

respectively, unrecognized share-based compensation associated with these awards totaled

$1.7

million,

$1.1

million and

$92,000.

The

$1.7

million of unrecognized share-based compensation at

December 31, 2019

is expected to be recognized over a weighted average period of

1.9

years.

The table below summarizes the restricted stock award activity for the period presented.

	Year Ended December 31, 2019					Year Ended December 31, 2018					Year Ended December 31, 2017
				Weighted Average					Weighted Average					Weighted Average
	Shares			Grant Date Fair Value		Shares			Grant Date Fair Value		Shares			Grant Date Fair Value
Balance, at Beginning of Period		31,002		$	19.58		8,662		$	17.00		-		$	-
Granted		39,994			23.96		39,789			20.00		12,981			17.00
Forfeited		(530	)		19.47		-			-		-			-
Earned and Issued		(30,495	)		21.31		(17,449	)		19.26		(4,319	)		17.00

Balance, at End of Period		39,971		$	22.64		31,002		$	19.58		8,662		$	17.00

Stock Grants

During the years ended

December 31, 2019

and

2018,

the Company issued a total of

4,440

shares and

3,750

shares of common stock, respectively, to non-employee directors as compensation for their board service. The shares were issued with weighted average grant date fair values of

$23.96

per share for the year ended

December 31, 2019

and

$20.00

per share for the year ended

December 31, 2018.

During the year ended

December 31, 2018,

the Company issued

5,552

shares to employees (the shares vested immediately upon issuance) at a weighted average grant date fair value of

$25.16

per share. The total stock-based compensation expense was determined based upon the market value of the Company’s common stock at the grant date applied to the total number of shares granted. Included in the grants is director fees expense for the year ended

December 31, 2019

$197,000,

and director fees expense and compensation expense of

$75,000

and

$140,000,

respectively, during the year ended

December 31, 2018.

Stock Warrants

In connection with the organization of the Company and the Bank, stock warrants were issued to organizers. The warrants were exercisable by their holders for the purchase of

101,000

shares of common stock of the Company at the exercise price of

$10

per share (warrant). All warrants were exercised prior to expiration during the year ended

December 31, 2019.

The warrants held an intrinsic value of

$1.1

million upon exercise.

December 31, 2018,

warrants for

87,625

shares at a weighted average exercise price of

$10.00

were outstanding. At

December 31, 2018,

all of the

87,625

outstanding warrants were vested and there was

unrecognized compensation expense. An amendment effective

February 1, 2016

extended the exercise period to

February 2, 2019

and retained the

$10

per share exercise price with

$48,000

of compensation cost recognized on the effective date of this amendment. As a result, in compliance with Section

409A

of the Internal Revenue Code of

1986,

as amended, the “optionality” of the warrants was eliminated thereby restricting the situations in which the warrants can be exercised to occur upon the earlier of (i) immediately prior to the

February 2, 2019

expiration date, (ii) a change in control of the Company or the Bank, (iii) the warrant holder’s death, (iv) the warrant holder becoming disabled, and (v) the warrant holder incurring a separation from the Company or the Bank (if the warrant holder is an employee of the Company or the Bank).

Using the Black-Scholes pricing model for the

87,625

shares (warrants) outstanding, the calculated value of

$2.50

per share (warrant) was estimated on the date of grant using the following assumptions: expected dividends of

1%,

expected life or term of

6.5

years, risk-free interest rate of

5.04%,

and expected volatility of

13.19%.

The expected volatility was estimated considering the historical volatility of an appropriate industry sector.

Stock Options

2006,

the Company established a stock option plan with

1,500,000

shares available to be granted as options under the plan. Under the provisions of the plan, the option price cannot be less than the fair value of the underlying common stock as of the option grant date, and the maximum option term cannot exceed

ten

years. The

2006

Stock Option Plan expired on

December 22, 2016

and the Company is

longer permitted to issue additional stock options under this plan.

Compensation expense recognized as a result of vesting was approximately

$77,000,

$119,000

and

$207,000

for the years ended

December 31, 2019,

2018

and

2017,

respectively.

The Company uses the Black-Scholes option pricing model to estimate the calculated value of the various share-based awards for the year ended

December 31, 2016.

There were

share-based awards for the years ended

December 31, 2019

and

2018,

respectively, since the Plan expired

December 22, 2016.

The following is an analysis of the activity related to the stock options:

	Years Ended December 31,
	2019					2018					2017
	Number of			Weighted Average		Number of			Weighted Average		Number of			Weighted Average
	Options			Exercise Price		Options			Exercise Price		Options			Exercise Price
Outstanding Options, at Beginning of Period		780,080		$	12.74		831,080		$	12.73		998,480		$	12.82
Granted		-			-		-			-		-			-
Exercised		(54,780	)		15.28		(49,000	)		12.42		-			-
Forfeited or Expired		-			-		(2,000	)		17.11		(167,400	)		13.25

Outstanding Options, at End of Period		725,300		$	12.55		780,080		$	12.74		831,080		$	12.73

Exercisable, at End of Period		724,300		$	12.55		761,747		$	12.64		784,698		$	12.49

December 31, 2019,

options for

724,300

shares at a weighted average exercise price of

$12.55

were vested and exercisable, and there were

1,000

nonvested options and approximately

$5,000

of unrecognized compensation costs related to these options which is expected to be recognized over a period of

one

year. The aggregate intrinsic value of both exercisable and outstanding awards at

December 31, 2019

$9.0

million with a weighted average remaining contractual life of

1.4

years.

December 2017,

option agreements for

105,250

options that were fully vested and set to expire in

December 2017

were amended to extend the expiration date to

January 15, 2021,

with compensation cost of

$63,000

recognized on the effective date of the amendments. In

December 2016,

option agreements for

330,000

options that were fully vested and set to expire in

December 2016

were amended to extend the expiration date to

January 15, 2020,

with compensation cost of

$168,000

recognized on the effective date of the amendments. Since these amendments extended the exercise period and retained the original per share exercise price, the “optionality” was eliminated in compliance with Section

409A

of the Internal Revenue Code of

1986,

as amended, thereby restricting the situations in which the options can be exercised to occur upon the earlier of (i) immediately prior to the expiration date, (ii) a change in control of the Company or the Bank, (iii) the option holder’s death, (iv) the option holder becoming disabled, and (v) the option holder incurring a separation from the Company or the Bank (if the option holder is an employee of the Company or the Bank).