11. Stock compensation

PSB has a 2003 Stock Option and Incentive Plan (the “2003 Plan”) and a 2012 Equity and Performance-Based Incentive Compensation Plan (the “2012 Plan”) covering 1.5 million and 1.0 million shares of PSB’s common stock, respectively. Under the 2003 Plan and 2012 Plan, PSB has granted non-qualified options to certain directors, officers and key employees to purchase shares of PSB’s common stock at a price not less than the fair market value of the common stock at the date of grant. Additionally, under the 2003 Plan and 2012 Plan, PSB has granted restricted shares of common stock to certain directors and restricted stock units to officers and key employees.

Options under the 2003 Plan and 2012 Plan vest over a five-year period from the date of grant at the rate of one fifth per year and expire 10 years after the date of grant. Generally, restricted stock units granted are subject to a six-year vesting schedule, none in year one and 20% for each of the next five years.

The weighted average grant date fair value of options granted during the years ended December 31, 2015, 2014 and 2013 was $8.49 per share, $10.95 per share and $9.18 per share, respectively. The Company has calculated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants during the years ended December 31, 2015, 2014 and 2013, respectively: a dividend yield of 2.5%, 2.3% and 2.2%; expected volatility of 16.1%, 17.7% and 17.5%; expected life of five years; and risk-free interest rates of 1.4%, 1.7% and 1.0%.

The weighted average grant date fair value of restricted stock units granted during the years ended December 31, 2015, 2014 and 2013 was $82.78, $81.47 and $73.85, respectively. The Company calculated the fair value of each restricted stock unit grant using the market value on the date of grant.

At December 31, 2015, there was a combined total of 1.3 million options and restricted stock units authorized to be granted.

In connection with the 2014 Special Cash Dividend discussed in Note 10, the number of options and exercise prices of all outstanding options as of December 31, 2014 were adjusted pursuant to the anti-dilution provisions of the applicable plans so that the option holders would be neither advantaged nor disadvantaged as a result of the Special Cash Dividend.

Information with respect to outstanding options and nonvested restricted stock units granted under the 2003 Plan and 2012 Plan is as follows:



				Weighted		Aggregate
		Weighted		Average		Intrinsic
	Number of	Average		Remaining		Value
Options:	Options	Exercise Price		Contract Life		(in thousands)
Outstanding at December 31, 2012	454,573	$	53.41
Granted	24,000	$	78.99
Exercised	(97,800)	$	47.87
Forfeited	—	$	—
Outstanding at December 31, 2013	380,773	$	56.45
Granted	16,000	$	82.84
Exercised	(61,273)	$	49.84
Forfeited	(4,000)	$	52.35
Special cash dividend adjustment (1)	10,352		N/A
Outstanding at December 31, 2014	341,852	$	57.11
Granted	16,000	$	80.13
Exercised	(99,178)	$	51.31
Forfeited	—	$	—
Outstanding at December 31, 2015	258,674	$	60.76	5.01 Years	$	6,899
Exercisable at December 31, 2015	194,999	$	56.23	4.14 Years	$	6,084

⁽¹⁾

In accordance with the applicable equity award plan documents, the number and exercise price of outstanding options as of December 31, 2014 have been adjusted as a result of the Special Cash Dividend so that the option holder maintains their economic position with respect to the shareholders.



		Weighted
	Number of	Average Grant
Restricted Stock Units:	Units	Date Fair Value
Nonvested at December 31, 2012	53,090	$	55.69
Granted	8,350	$	73.85
Vested	(13,690)	$	53.84
Forfeited	(2,650)	$	47.96
Nonvested at December 31, 2013	45,100	$	60.07
Granted	6,800	$	81.47
Vested	(12,980)	$	53.65
Forfeited	(3,750)	$	69.00
Nonvested at December 31, 2014	35,170	$	65.62
Granted	75,606	$	82.78
Vested	(25,384)	$	74.19
Forfeited	(6,740)	$	76.22
Nonvested at December 31, 2015	78,652	$	78.44

Effective March, 2014, the Company entered into a performance-based restricted stock unit program, the Senior Management Long-Term Equity Incentive Program for 2014-2017 (“2014 LTEIP”), with certain employees of the Company. Under the 2014 LTEIP, the Company established three levels of targeted restricted stock unit awards for certain employees, which would be earned only if the Company achieved one of three defined targets during 2014 to 2017. Under the 2014 LTEIP there is an annual award following the end of each of the four years in the program, with the award subject to and based on the achievement of total return targets during the previous year, as well as an award based on achieving total return targets during the cumulative four-year period 2014-2017. In the event the minimum defined target is not achieved for an annual award, the shares allocated to be awarded for such year are added to the shares that may be received if the four-year target is achieved. All restricted stock unit awards under the 2014 LTEIP vest in four equal annual installments beginning from the date of award. Up to 96,650 restricted stock units would be granted for each of the four years assuming achievement was met and up to 82,846 restricted stock units would be granted for the cumulative four-year period assuming achievement was met. Compensation expense is recognized based on the shares expected to be awarded based on the target level that is expected to be achieved. Net compensation expense of $8.2 million and $7.4 million related to the 2014 LTEIP was recognized for the years ended December 31, 2015 and 2014, respectively.

In connection with the 2014 LTEIP, targets for 2014 were achieved at the threshold total return level. As such, 66,506 restricted stock units were granted during the year ended December 31, 2015 at a weighted average grant date fair value of $83.47.

Effective January 1, 2012, the Company entered into a performance-based restricted stock unit program, the Senior Management Long-Term Equity Incentive Program for 2012-2015 (“2012 LTEIP”), with certain employees of the Company. The targets for 2012 and 2013 were not achieved and management determined in 2013 that it was not probable that the remaining targets under the 2012 LTEIP would be met. As such, the Company stopped recording amortization and recorded a reversal of all 2012 LTEIP amortization previously recorded in 2012 of $3.9 million during the year ended December 31, 2013.

Net compensation expense of $261,000, $1.1 million and $425,000 related to stock options was recognized during the years ended December 31, 2015, 2014 and 2013, respectively. Included in 2014 compensation expense relating to stock options was $644,000 of expense resulting from modifications made to outstanding stock options as a result of the Special Cash Dividend paid in December, 2014. Excluding the 2014 LTEIP amortization of $8.2 million and $7.4 million, net compensation expense of $433,000 and $526,000 related to restricted stock units was recognized during the years ended December 31, 2015 and 2014, respectively. Excluding the 2012 LTEIP reversal of $3.9 million, net compensation expense of $671,000 related to restricted stock units was recognized during the year ended December 31, 2013.

As of December 31, 2015, there was $412,000 of unamortized compensation expense related to stock options expected to be recognized over a weighted average period of 3.0 years. As of December 31, 2015, there was $20.2 million (includes $18.5 million from the 2014 LTEIP) of unamortized compensation expense related to restricted stock units expected to be recognized over a weighted average period of 4.3 years.

Cash received from 99,178 stock options exercised during the year ended December 31, 2015 was $5.1 million. Cash received from 61,273 stock options exercised during the year ended December 31, 2014 was $3.1 million. Cash received from 97,800 stock options exercised during the year ended December 31, 2013 was $4.7 million. The aggregate intrinsic value of the stock options exercised was $2.6 million, $2.1 million and $3.1 million during the years ended December 31, 2015, 2014 and 2013, respectively.

During the year ended December 31, 2015, 25,384 restricted stock units vested (16,634 related to the 2014 LTEIP); in settlement of these units, 15,734 shares were issued (10,495 related to the 2014 LTEIP), net of shares applied to payroll taxes. The aggregate fair value of the shares vested for the year ended December 31, 2015 was $2.0 million ($1.3 million related to the 2014 LTEIP). During the year ended December 31, 2014, 12,980 restricted stock units vested; in settlement of these units, 8,066 shares were issued, net of shares applied to payroll taxes. The aggregate fair value of the shares vested for the year ended December 31, 2014 was $1.1 million. During the year ended December 31, 2013, 13,690 restricted stock units vested; in settlement of these units, 8,547 shares were issued, net of shares applied to payroll taxes. The aggregate fair value of the shares vested for the year ended December 31, 2013 was $1.0 million.

In April, 2015, the shareholders of the Company approved the issuance of an additional 130,000 shares of common stock under the Retirement Plan for Non-Employee Directors (the “Director Plan”). Under the Director Plan, the Company grants 1,000 shares of common stock for each year served as a director up to a maximum of 8,000 shares issued upon retirement. The Company recognizes compensation expense over the requisite service period. As a result, included in the Company’s consolidated statements of income was compensation expense of $316,000, $550,000 and $264,000 for the years ended December 31, 2015, 2014 and 2013, respectively. Included in 2014 compensation expense relating to the retirement shares was $243,000 of expense resulting from the increase in maximum shares. As of December 31, 2015, 2014 and 2013, there was $1.2 million, $1.5 million and $1.4 million, respectively, of unamortized compensation expense related to these shares. No shares were issued during the years ended December 31, 2015, 2014 and 2013.