Employee Benefit Plans

Stock Option Plans

The Company has incentive and nonqualified option plans, which allow for the grant of options to officers, employees and members of the Board of Directors. Transactions under the Company’s stock option plans for the nine months ended September 30, 2018 are summarized in the following table:



	Shares		Weighted average exercise price		Weighted average remaining contractual life in years	Aggregate intrinsic value
Outstanding at December 31, 2017	504,573		$	8.31	5.7	$	5,772,843
Options granted	114,500		20.24
Options exercised	(100,973	)	4.95
Options forfeited	(7,433	)	15.47
Options expired	—		—
Outstanding at September 30, 2018	510,667		$	11.54	6.7	$	5,799,514
Exercisable at September 30, 2018	311,706		$	7.95	5.4	$	4,659,036

Grants under the Company’s incentive and nonqualified option plans generally vest over 3 years and must be exercised within 10 years of the date of grant. The exercise price of each option is the market price on the date of grant. As of September 30, 2018, 2,462,585 shares have been reserved for issuance upon the exercise of options, 510,667 option grants are outstanding, and 1,676,613 option grants have been exercised, forfeited or expired, leaving 275,305 shares available for grant.

The fair values of the options granted during the nine months ended September 30, 2018 and 2017 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions. No options were granted during the three months ended September 30, 2018 and 2017:



	For the three months ended September 30,						For the nine months ended September 30,
	2018			2017			2018			2017
Number of options granted	—			—			114,500			47,100
Weighted average exercise price	$	—		$	—		$	20.24		$	16.37
Weighted average fair value of options	$	—		$	—		$	5.97		$	4.64
Expected life in years (1)	0.00			0.00			6.35			6.57
Expected volatility (2)	—		%	—		%	26.40		%	28.12		%
Risk-free interest rate (3)	—		%	—		%	2.48		%	2.18		%
Dividend yield (4)	—		%	—		%	1.14		%	1.15		%

(1) The expected life of the options was estimated based on historical employee behavior and represents the period of time that options granted are expected to be outstanding.

(2) The expected volatility of the Company’s stock price was based on the historical volatility over the period commensurate with the expected life of the options.

(3) The risk-free interest rate is the U.S. Treasury rate commensurate with the expected life of the options on the date of grant.

(4) The expected dividend yield is the projected annual yield based on the grant date stock price.

Upon exercise, the Company issues shares from its authorized but unissued common stock to satisfy the options. The following table presents information about options exercised during the three and nine months ended September 30, 2018 and 2017:



	For the three months ended September 30,				For the nine months ended September 30,
	2018		2017		2018		2017
Number of options exercised	23,366		18,480		100,973		65,162
Total intrinsic value of options exercised	$	462,533	$	201,134	$	1,699,924	$	686,054
Cash received from options exercised	108,156		89,536		500,114		360,327
Tax deduction realized from options	$	130,018	$	82,163	$	477,849	$	280,253

The following table summarizes information about stock options outstanding and exercisable at September 30, 2018:



		Options outstanding				Options exercisable
Range of exercise prices		Options outstanding	Weighted average remaining contractual life (in years)	Weighted average exercise price		Options exercisable	Weighted average exercise price
$	0.00 - 4.00	12,600	0.8	$	3.69	12,600	$	3.69
	4.01 - 8.00	159,600	4.1	6.21		159,600	6.21
	8.01 - 12.00	152,901	7.0	9.40		115,497	9.22
	12.01 - 16.00	44,066	8.2	14.96		14,007	14.93
	16.01 - 20.00	101,500	9.0	18.86		10,002	16.75
	20.01 - 24.00	40,000	9.4	21.15		—	—
	Total	510,667	6.7	$	11.54	311,706	$	7.95

Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") Topic 718, “Compensation - Stock Compensation,” requires an entity to recognize the fair value of equity awards as compensation expense over the period during which an employee is required to provide service in exchange for such an award (vesting period). Compensation expense related to stock options and the related income tax benefit for the three and nine months ended September 30, 2018 and 2017 are detailed in the following table:



	For the three months ended September 30,				For the nine months ended September 30,
	2018		2017		2018		2017
Compensation expense	$	115,345	$	71,675	$	357,007	$	212,514
Income tax benefit	32,424		29,279		100,355		86,812

As of September 30, 2018, unrecognized compensation costs related to nonvested share-based compensation arrangements granted under the Company’s stock option plans totaled approximately $702 thousand. That cost is expected to be recognized over a weighted average period of 2.0 years.

Restricted Stock Awards

Restricted stock is issued under the stock bonus program to reward employees and directors and to retain them by distributing stock over a period of time. The following table summarizes nonvested restricted stock activity for the nine months ended September 30, 2018:



	Shares		Average grant date fair value
Nonvested restricted stock at December 31, 2017	94,003		$	12.53
Granted	38,300		20.64
Cancelled	(1,624	)	17.00
Vested	(29,142	)	11.30
Nonvested restricted stock at September 30, 2018	101,537		$	15.87

Restricted stock awards granted to date vest over a period of 4 years and are recognized as compensation to the recipient over the vesting period. The awards are recorded at fair market value at the time of grant and amortized into salary expense on a straight line basis over the vesting period. As of September 30, 2018, 518,157 shares of restricted stock were reserved for issuance, of which 74,728 shares are available for grant.

Restricted stock awards granted during the three and nine months ended September 30, 2018 and 2017 were as follows:



	For the three months ended September 30,				For the nine months ended September 30,
	2018		2017		2018		2017
Number of shares granted	—		—		38,300		38,400
Average grant date fair value	$	—	$	—	$	20.64	$	16.36

Compensation expense related to restricted stock for the three and nine months ended September 30, 2018 and 2017 is detailed in the following table:



	For the three months ended September 30,				For the nine months ended September 30,
	2018		2017		2018		2017
Compensation expense	$	143,854	$	108,833	$	429,990	$	358,411
Income tax benefit	40,437		44,458		120,870		146,411

As of September 30, 2018, there was approximately $1.2 million of unrecognized compensation cost related to nonvested restricted stock awards granted under the Company’s stock incentive plans. That cost is expected to be recognized over a weighted average period of 2.7 years.

401(k) Savings Plan

The Bank has a 401(k) savings plan covering substantially all employees. Under the Plan, an employee can contribute up to 80 percent of their salary on a tax deferred basis. The Bank may also make discretionary contributions to the Plan. The Bank contributed $146 thousand and $119 thousand during the three months ended September 30, 2018 and 2017, respectively, and $458 thousand and $376 thousand during the nine months ended September 30, 2018 and 2017, respectively.

Deferred Fee Plan

The Company has a deferred fee plan for Directors and executive management. Directors of the Company have the option to elect to defer up to 100 percent of their respective retainer and Board of Director fees, and each member of executive management has the option to elect to defer 100 percent of their year end cash bonuses. Director and executive deferred fees totaled $22 thousand and $8 thousand during the three months ended September 30, 2018 and 2017, and $282 thousand and $134 thousand during the nine months ended September 30, 2018, and 2017 respectively. The interest paid on the deferred balances totaled $18 thousand and $11 thousand during the three months ended September 30, 2018 and 2017, and $49 thousand and $32 thousand during the nine months ended September 30, 2018, and 2017 respectively. The fees distributed on the deferred balances totaled $2 thousand and $3 thousand during the three months ended September 30, 2018 and 2017, and $9 thousand and $3 thousand during the nine months ended September 30, 2018, and 2017.

Benefit Plans

In addition to the 401(k) savings plan which covers substantially all employees, in 2015 the Company established an unfunded supplemental defined benefit plan to provide additional retirement benefits for the President and Chief Executive Officer (“CEO”) and certain key executives.

On June 4, 2015, the Company approved the Supplemental Executive Retirement Plan (“SERP”) pursuant to which the President and CEO is entitled to receive certain supplemental nonqualified retirement benefits. On September 27, 2018 the Company approved a change in calculation of the Retirement Benefit payable under the Plan so that the Retirement Benefit shall be an amount equal to sixty percent (60%) of the average of Executive's base salary for the thirty-six (36) months immediately preceding executive's separation from service after age 66, adjusted annually thereafter by two percent (2%). The total benefit is to be made payable in fifteen annual installments. The future payments are estimated to total $4.2 million. A discount rate of 4.00 percent was used to calculate the present value of the benefit obligation.

The President and CEO commenced vesting in this retirement benefit on January 1, 2014, and vests an additional three percent (3%) each year until fully vested on January 1, 2024. In the event that the President and CEO’s separation from service from the company were to occur prior to full vesting, the President and CEO would be entitled to and shall be paid the vested portion of the retirement benefit calculated as of the date of separation from service. Notwithstanding the foregoing, upon a Change in Control, and provided that within 6 months following the Change in Control the President and CEO is involuntarily terminated for reasons other than “cause” or the President and CEO resigns for “good reason”, as such is defined in the SERP, or the President and CEO voluntarily terminates his employment after being offered continued employment in a position that is not a “Comparable Position”, as such is also defined in the SERP, the President and CEO shall become one hundred percent (100%) vested in the full retirement benefit.

No contributions or payments have been made during the three and nine months ended September 30, 2018. The following table summarizes the components of the net periodic pension cost of the defined benefit plan recognized during the three and nine months ended September 30, 2018 and 2017:



	For the three months ended September 30,				For the nine months ended September 30,
(In thousands)	2018		2017		2018		2017
Service cost (1)	$	953	$	35	$	1,159	$	86
Interest cost	16		11		47		32
Amortization of prior service cost	20		21		62		63
Net periodic benefit cost	$	989	$	67	$	1,268	$	181

(1) On September 27, 2018, the Company approved a change in calculation of the Retirement Benefit resulting in an additional $850 thousand in current expense.

The following table summarizes the changes in benefit obligations of the defined benefit plan during the nine months ended September 30, 2018 and 2017:



	For the nine months ended September 30,
(In thousands)	2018		2017
Benefit obligation, beginning of year	$	1,187	$	1,023
Service cost (1)	1,159		86
Interest cost	47		32
Benefit obligation, end of period	$	2,393	$	1,141

(1) On September 27, 2018, the Company approved a change in calculation of the Retirement Benefit resulting in an additional $850 thousand in current expense.

On October 22, 2015, the Company entered into an Executive Incentive Retirement Plan (the “Plan”) with certain key executive officers. The Plan has an effective date of January 1, 2015.

The Plan is an unfunded, nonqualified deferred compensation plan. For any Plan Year, a guaranteed annual Deferral Award percentage of seven and one half percent (7.5%) of the participant’s annual base salary will be credited to each Participant’s Deferred Benefit Account. A discretionary annual Deferral Award equal to seven and one half percent (7.5%) of the participant’s annual base salary may be credited to the Participant’s account in addition to the guaranteed Deferral Award, if the Bank exceeds the benchmarks set forth in the Annual Executive Bonus Matrix. The total Deferral Award shall never exceed fifteen percent (15%) of the participant's base salary for any given Plan Year. Each Participant shall be one hundred percent 100% vested in all Deferral Awards as of the date they are awarded.

As of September 30, 2018, the Company had total year to date expenses of $66 thousand related to the Plan. The Plan is reflected on the Company’s balance sheet as accrued expenses.

Certain members of management are also enrolled in a split-dollar life insurance plan with a post retirement death benefit of $250 thousand. Total expenses related to this plan were $8 thousand and $1 thousand for the three months ended September 30, 2018 and 2017, and $10 thousand and $4 thousand for the nine months ended September 30, 2018 and 2017, respectively.