Note 7. Share-based Compensation Plans

As of June 30, 2016, the Company had one active share-based employee compensation plan, which was approved by the Company’s shareholders in May 2015. This plan, referred to as the “2015 Equity Incentive Plan,” authorizes the Company to grant various types of share-based compensation awards to the Company’s employees and Board of Directors such as stock options, restricted stock awards, and restricted stock units. Under the 2015 Equity Incentive Plan a maximum of 2,500,000 shares of the Company’s common stock may be issued. Shares issued under this plan, other than stock options and stock appreciation rights, are counted against the plan on a two shares for every one share actually issued basis. Awards that are cancelled, expired, forfeited, fail to vest, or otherwise result in issued shares not being delivered to the grantee, are again made available for the issuance of future share-based compensation awards. Additionally, under this plan, no one individual may be granted shares in aggregate that exceed more than 250,000 shares during any calendar year. The Company’s Board of Directors may terminate the 2015 Equity Incentive Plan at any time, and for any reason before the plan expires on December 3, 2024.

The Company also has two non-active share-based compensation plans. These plans are referred to as the “2005 Equity Based Compensation Plan,” and the “1997 Stock Option Plan.” As of June 30, 2016, no further grants can be made from either of these plans.

Restricted Stock Awards

The Company grants restricted stock periodically for the benefit of employees and to members of the Board of Directors. Restricted stock issued typically vests ratably over a period of three to five years depending on the specific terms of the grant. Restricted stock grants may be subject to the achievement of certain performance goals. Compensation costs related to restricted stock awards are recognized over the vesting period of those awards and included in salaries and employee benefits. Compensation cost related to awards that are subject to performance conditions is recognized over the vesting period if the Company believes it is more likely than not that the performance conditions will be achieved. If the Company believes it is more likely than not that performance conditions will not be achieved, the Company ceases the accrual of compensation cost for the related award, and previously recognized compensation cost for the unvested portion of the award is reversed from earnings. The Company includes a forfeiture rate assumption in its accrual for compensation cost associated with restricted stock awards, which is based on the Company’s historical experience with such awards.

The following table provides a summary of activity related to restricted stock granted for the six months ended June 30, 2016:

	Number of	Average Grant
	Shares	Date Fair Value
Balance December 31, 2015	162,394	$	7.30
Granted	86,086	7.77
Vested	(32,276)	6.88
Forfeited	(15,265)	7.75

Balance June 30, 2016	200,939	$	7.53

Included in the table above are performance-based grants of restricted stock totaling 13,245 shares as of June 30, 2016.

Restricted Stock Units

Restricted stock units are granted periodically for the benefit of employees. Upon vesting, certain of these awards settle in shares of the Company’s common stock, while others settle in cash. Awards that settle in shares of the Company’s common stock are made to executive officers, while those that settle in cash are made to other officers of the Bank. The Company recognizes compensation cost associated with restricted stock units that settle in shares of the Company’s common stock through charges to current period earnings, included in salaries and employee benefits, and a corresponding increase in additional paid in capital. Compensation cost for these awards is recognized ratably over the period in which the awards are expected to vest. For restricted stock units that settle in cash, the Company accrues a liability for the ultimate settlement of the award through charges to current period earnings, included in salaries and employee benefits. Compensation cost for these awards is recognized ratably over the period in which the awards are expected to vest.

Restricted stock units that settle in shares of the Company’s common stock have vesting conditions which are based on pre-determined performance targets. Based on the achievement of these performance targets, the number of awards that vest can be adjusted upward to a maximum of 150% of the granted amount or downward to zero. Certain of the Company’s performance based restricted stock units have performance targets based on the Company’s return on average assets and total shareholder return over a specified period of time, relative to the Company’s pre-determined peer group.

The grant date fair value of performance based restricted stock units that do not contain a market condition, such as those where vesting is based on total shareholder return, is equivalent to the price of the Company’s common stock on the date of grant. The Company incorporates a forfeiture rate assumption in its accrual for compensation cost for these awards, which is based on the Company’s historical experience with similar awards. For awards that contain a market condition, the Company employs the use of a Monte Carlo simulation through an independent party to determine the grant date fair value of those awards. The Monte Carlo simulation estimates the grant date fair value of these awards using input assumptions similar to those in the Black-Scholes model, however it also incorporates into the grant date fair value calculation the probability that the performance targets will or will not be achieved.

The grant date fair value for restricted stock units that settle in cash is equivalent to the price of the Company’s common stock on the date of grant. However, the ultimate settlement value of these awards and the related compensation cost may fluctuate, based on increases and decreases in the value of the Company’s common stock.

The following table provides a summary of activity related to restricted stock units granted for the six months ended June 30, 2016:

	Settle in Stock			Settle in Cash
		Average Grant			Average Grant
	Shares	Date Fair Value		Shares	Date Fair Value
Balance, December 31, 2015	-	$	-	-	$	-
Granted	38,104	7.56		77,968	7.94

Balance, June 30, 2016	38,104	$	7.56	77,968	$	7.94

Stock Options

Stock options are granted periodically for the benefit of employees. The fair value of each stock option award is determined on the date of grant using the Black-Scholes option valuation model, which uses assumptions outlined in the table below. Expectations for volatility are based on the historical volatility of the Company’s common stock. The Company estimates forfeiture rates based on historical employee option exercise and termination experience. The Company recognizes share-based compensation costs ratably over the vesting period of the award, which is typically a period of three to five years.

The following table provides information related to options that have vested or are expected to vest and exercisable options as of June 30, 2016:

	Options Outstanding			Average	Average
	Number	Weighted Average		Remaining	Intrinsic
	of Shares	Exercise Price		Life (years)	Value
Balance, December 31, 2015	932,553	$	7.19
Granted	36,022	7.27
Forfeited	(28,490)	7.47
Exercised	(7,877)	6.15

Balance, June 30, 2016	932,208	$	7.20	7.31	$	1,019,659

Exercisable June 30, 2016	443,434	$	7.00	5.95	$	729,326
Vested and expected to vest as of June 30, 2016	898,496	$	7.19	7.26	$	1,003,426

The total intrinsic value, the amount by which the stock price exceeded the exercise price on the date of exercise, of options exercised in all plans during the period ended June 30, 2016 was $12 thousand. The aggregate tax deficiency related to stock options and disqualifying dispositions on the exercise of incentive stock options was $108 thousand during the six month period ended June 30, 2016, and was recorded as an adjustment to additional paid in capital.

The following table presents the assumptions used in the calculation of the weighted average fair value of options granted at various dates during the six months ended June 30, 2016 and 2015:

	For the Six Months Ended
	June 30,
	2016		2015
Expected volatility	31.85%		38.04%
Expected term (years)	5.00		5.00
Dividend yield	3.30%		2.58%
Risk free rate	1.31%		1.57%
Weighted-average grant date fair value	$	1.50	$	2.15

The fair value of each stock option award is determined on the date of grant using the Black-Scholes option valuation model, which uses assumptions outlined in the table above. Expectations for volatility are based on the historical volatility of the market price for the Company’s common stock.

Share-Based Compensation Expense

The following table provides a summary of the expense the Company recognized related to share-based compensation awards, as well as the remaining expense associated with those awards as of and for the three and six months ended June 30, 2016 and 2015:

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
	(dollars in thousands)
Compensation expense:
Stock options	$	103	$	136	$	226	$	248
Restricted stock	199		158		283		287
Restricted stock units	60		-		60		-

Total	$	362	$	294	$	569	$	535

Unrecognized compensation expense:
Stock options	$	766	$	1,109
Restricted stock	925		899
Restricted stock units	598		-

Total	$	2,289	$	2,008

Expense related to share-based compensation is charged to earnings over the period the awards are expected to vest, and is included in salaries and employee benefits in the consolidated financial statements. For the six months ended June 30, 2016 and 2015, the total income tax benefit recognized related to share-based compensation was $108 thousand, and $69 thousand, respectively. At June 30, 2016, compensation expense related to unvested stock options, restricted stock awards and restricted stock units is expected to be recognized over 2.4 years, 2.2 years, and 2.8 years respectively.