14.EMPLOYEE BENEFITS AND SHARE BASED COMPENSATION

The Company has a 401(k) Plan designed to qualify under Section 401 of the Internal Revenue Code of 1986 that allows employees to defer a portion of their salary compensation as savings 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.  All employees are eligible to participate in the 401(k) Plan after meeting minimum age and period of service requirements.  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.

StellarOne’s 401(k) plan covered substantially all of its employees and held $39.4 million in net assets available for benefit as of December 31, 2013.  Pursuant to the StellarOne Merger Agreement, the StellarOne 401(k) plan was terminated by StellarOne immediately prior to its merger into the Company.  All assets of the StellarOne 401(k) plan were transferred to the Company’s 401(k) Plan on May 1, 2014, and the Company assumed the administrative duties relating to StellarOne’s 401(k) plan at such time. 

The following were payments made to the Company’s employees, in accordance with the plans described above, in 2014, 2013, and 2012 (dollars in thousands):

 

The Company had an obligation under deferred compensation plans of $10.3 million and $7.3 million at December 31, 2014 and 2013, respectively, to employees and to certain current and former members of the Bank’s and StellarOne’s Boards of Directors.    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 historically approved an annual short-term cash incentive compensation plan (the Management Incentive Plan, or “MIP”) as a means of attracting, rewarding, and retaining the Company’s 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 key executive.  Each executive 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 $898,000,  $939,000, and $835,000 for the years ended December 31, 2014, 2013, and 2012, respectively.

The Company’s 2011 Stock Incentive Plan (the “2011 Plan”) provides for the granting of stock-based awards to key employees of the Company and its subsidiaries in the form of: (i) incentive stock options intended to comply with the requirements of Section 422 of the Internal Revenue Code of 1986 (“incentive stock options”); (ii) non-qualified stock options; (iii)  restricted stock, and (iv) other stock-based awards.  The Company issues new shares to satisfy stock-based awards, and the option price cannot be less than the fair market value of the stock on the grant date.   The stock option’s maximum term is ten years from the date of grant.  No stock options have been granted since February 2012, and restricted stock and other stock-based awards typically vest in varying annual installments over a three to five year vesting schedule.  The 2011 Plan was approved by the Company’s Board of Directors with an effective date of January 1, 2011, subject to shareholder approval that was received at the annual meeting of shareholders held on April 26, 2011.

The 2011 Plan replaced the 2003 Stock Incentive Plan (“2003 SIP”) as the Company’s equity compensation plan.  Awards made under the 2003 SIP prior to the plan’s termination date (April 26, 2011), and outstanding on that date, remain valid in accordance with their terms.  The shares of common stock issued pursuant to awards granted under the 2003 SIP and the 2011 Plan have been registered with the SEC under the Securities Act of 1933 pursuant to two registration statements on Form S-8 filed by the Company.

 

In connection with the Company’s acquisition of StellarOne, each outstanding option to acquire StellarOne common stock, whether or not exercisable, was assumed by the Company and converted into an option to acquire the same number of whole shares of the Company’s common stock, subject to adjustment based on the merger exchange ratio of 0.9739.  The exercise price per share of each new option was equal to the exercise price per share under the original StellarOne option divided by the merger exchange ratio of 0.9739.  Each converted StellarOne stock option has the same terms and conditions that were in effect prior to the completion of the acquisition.  Restricted StellarOne stock awards, which were unvested and outstanding prior to the merger, were accelerated and vested immediately as shares of the Company’s outstanding stock on the same basis as stock options.  Restricted common stock of the Company was issued from StellarOne equity compensation plans assumed in the acquisition, and subsequent awards from the Company will be issued from the 2011 Plan.

The following table summarizes the shares available in the 2011 Plan as of December 31, 2014:  

 

 

 

For the year ended December 31, 2014, the Company recognized stock-based compensation expense (included in salaries and benefits expense) (dollars in thousands, except per share data) as follows:

 

 

Stock Options

 

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

 

 

 

A summary of the options outstanding at December 31, 2014 is as follows:

 

 

The Company issues shares upon option exercise from the Company’s authorized but unissued shares.   The Company expects to issue approximately 30,000 shares as a result of option exercises in 2015 as certain “in the money” options are set to expire over the next 15 months.

 

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.  No options have been granted since February 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 common stock price over the expected life of the options.

(4) Based upon the 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 (i) vested or are expected to vest and (ii) stock options exercisable as of December 31, 2014:

 

During the year ended December 31, 2014, there were 75,282 stock options exercised with a total intrinsic value (the amount by which the stock price exceeded the exercise price) and fair value of approximately $573,000 and $1.8 million, respectively.  Cash received from the exercise of stock options for the year ended December 31, 2014 was approximately $1.2 million, and the tax benefit realized from tax deductions associated with options exercised during the year was approximately $187,000. 

The fair value of all stock options vested during 2014 was approximately $313,000 and the total intrinsic value of all stock options outstanding was $3.1 million as of December 31, 2014.

During the year ended December 31, 2013, there were 50,119 stock options exercised with a total intrinsic value (the amount by which the stock price exceeded 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 as of December 31, 2013.

During the year ended December 31, 2012, there were 2,376 stock options 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 $31,000, 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 as of December 31, 2012.  

 

Restricted Stock

The 2011 Plan permits the granting of restricted stock awards but is 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 restricted 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). Nonvested shares of restricted stock are included in the computation of basic earnings per share.

 

The following table summarizes the restricted stock activity for the year ended December 31, 2014:

 

 

The estimated unamortized compensation expense, net of estimated forfeitures, related to restricted stock and stock options issued and outstanding as of December 31, 2014 that will be recognized in future periods is as follows (dollars in thousands):

 

 

At December 31, 2014, there was $3.4 million of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the 2011 Plan. The cost is expected to be recognized through 2018.