13.EMPLOYEE BENEFITS

The Company has a 401(k) Plan that allows employees to make contributions for retirement.  The 401(k) Plan provides for the Company to match employee contributions based on each employee’s contribution percentage.  For each employee’s 1% through 3% dollar contributions, the Company will match 100% of such dollar contributions, and for each employee’s 4% through 5% dollar contributions, the Company will match 50% of such dollar contributions.  The Bank also has an ESOP.  All full and part-time employees of the Bank with 1,000 hours of service are eligible to participate in the ESOP.  The Company makes discretionary profit sharing contributions into the 401(k) Plan, ESOP, and in cash.  Company discretionary contributions to both the 401(k) Plan and the ESOP are allocated to participant accounts in proportion to each participant’s compensation and vest over five and six year periods, respectively.  Employee contributions to the ESOP are not allowed.

The following were payments made to the Company’s employees, in accordance with the plans described above, in 2013, 2012, and 2011 (dollars in thousands):

 

 

The Company had an obligation to certain members of the Bank’s Board of Directors under deferred compensation plans in the amount of $903,000 and $957,000 at December 31, 2013 and 2012, respectively.  The expenses related to the deferred compensation plans were $86,000,  $84,000, and $80,000 for the years ended December 31, 2013, 2012, and 2011, respectively. The Company owns life insurance policies on plan beneficiaries as an informal funding vehicle to meet future benefit obligations.

The Company’s Board of Directors has approved an annual incentive compensation plan (the Management Incentive Plan, or “MIP”) as a means of attracting, rewarding, and retaining key executives.  Each annual MIP, as it may be amended from time to time, is based on both corporate and individual objectives established annually for each participant.  Each participant is evaluated within these two categories to determine eligibility and rate of incentive compensation based on performance.  Salaries and benefits expense for incentive compensation under the MIP was $939,000,  $835,000, and $711,000 for the years ended December 31, 2013, 2012, and 2011, respectively.

The Company’s 2011 Stock Incentive Plan (the “2011 Plan”) provides, and the 2003 Stock Incentive Plan (the “2003 Plan”) provided until it expired in June 2013, for the granting of stock-based awards in the form of incentive stock options intended to comply with the requirements of Section 422 of the Internal Revenue Code of 1986 (“incentive stock options”), non-statutory stock options, and nonvested stock to key employees of the Company and its subsidiaries.  The Company issues new shares to satisfy stock-based awards.  Under both plans, the option price cannot be less than the fair market value of the stock on the grant date, and the stock option’s maximum term is ten years from the date of grant and vests in equal annual installments of 20% over a five year vesting schedule.  The 2011 Plan became effective on January 1, 2011 after its approval by shareholders at the annual meeting of shareholders held on April 26, 2011.  The following table summarizes the shares available in the 2011 Plan as of December 31, 2013:  

 

 

 

For the year ended December 31, 2013, the Company recognized stock-based compensation expense (included in salaries and benefits expense) of approximately $889,000 (or $708,000 net of tax), or $0.04 per common share.  For years ended December 31, 2012 and 2011, respectively, the Company recognized stock-based compensation expense of approximately $1.3 million and $717,000  ($943,000 and $552,000, net of tax), or approximately $0.05 per common share for the year ended December 31, 2012 and approximately $0.02 for the year ended December 31, 2011.  

 

Stock Options

 

The following table summarizes the stock option activity for the last three years:

 

 

 

A summary of the options outstanding at December 31, 2013 is as follows:

 

 

 

 

The Company issues shares upon option exercise from the Company’s authorized but unissued shares, and the Company expects to issue an insignificant amount of shares for option exercises during 2014.

 

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table for the years ended December 31, 2013, 2012, and 2011. No options have been granted since February of 2012:

 

 

 

 

 

(1) Calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant.

(2) Based on the average of the contractual life and vesting schedule for the respective option.

(3) Based on the monthly historical volatility of the Company’s stock price over the expected life of the options.

(4) Based upon the U.S. Treasury bill yield curve, for periods within the contractual life of the option, in effect at the time of grant.

 

The following table summarizes information concerning stock options issued to the Company’s employees that are vested or are expected to vest and stock options exercisable as of December 31, 2013:

 

During the year ended December 31, 2013, there were 30 stock option awards exercised with a total intrinsic value (the amount by which the stock price exceeds the exercise price) and fair value of approximately $268,000 and $1.2 million, respectively.  Cash received from the exercise of stock options for the year ended December 31, 2013 was approximately $927,000, and the tax benefit realized from tax deductions associated with options exercised during the year was $54,000.  

The fair value of all stock options vested during 2013 was approximately $335,000 and the total intrinsic value of all stock options outstanding was $3.5 million.

During the year ended December 31, 2012, there were two stock option awards exercised with a total intrinsic value and fair value of approximately $7,400 and $36,000, respectively.  Cash received from the exercise of stock options for the year ended December 31, 2012 was approximately $29,000, and the tax benefit realized from tax deductions associated with options exercised during the year was $2,600.  

The fair value of all stock options vested during 2012 was approximately $279,000 and the total intrinsic value of all stock options outstanding was $623,000.  

During the year ended December 31, 2011, the total intrinsic value for stock options exercised was $88,000.   The total intrinsic value of stock options outstanding was $1,000. The fair value of stock options vested was approximately $238,000.   Cash received from the exercise of stock options for the year ended December 31, 2011 was approximately $302,000, and the tax benefits realized from tax deductions associated with options exercised during the year were $15,000. 

 

Nonvested Stock

The 2011 Plan permits, and the 2003 Plan permitted until it expired in June 2013, the granting of nonvested stock but are limited to one-third of the aggregate number of total awards granted.  This equity component of compensation is divided between restricted (time-based) stock grants and performance-based stock grants.  Generally, the restricted stock vests 50% on each of the third and fourth anniversaries from the date of the grant.  The performance-based stock is subject to vesting based on achieving certain performance metrics; the grant of performance-based stock is subject to approval by the Company’s Compensation Committee at its sole discretion.  The value of the nonvested stock awards was calculated by multiplying the fair market value of the Company’s common stock on grant date by the number of shares awarded.  Employees have the right to vote the shares and to receive cash or stock dividends (restricted stock), if any, except for the nonvested stock under the performance-based component (performance stock).

 

The following table summarizes the nonvested stock activity for the year ended December 31, 2013:

 

 

The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of December 31, 2013 that will be recognized in future periods is as follows (dollars in thousands):

 

 

At December 31, 2013, there was $3.3 million of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the plan. The cost is expected to be recognized through 2017.