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Share-Based Compensation

12 Months Ended

Dec. 31, 2019

Note 18—Share-Based Compensation

Compensation cost is recognized for stock options and restricted stock awards issued to employees. Compensation cost is measured as the fair value of these awards on their date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used as the fair value of restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the restriction period for restricted stock awards. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

The Company’s 2004, 2012 and 2019 stock incentive programs are long-term retention programs intended to attract, retain, and provide incentives for key employees and non-employee directors in the form of incentive and non-qualified stock options and restricted stock.

Stock Options

With the exception of non-qualified stock options granted to directors under the 2004 and 2012 plans, which in some cases may be exercised at any time prior to expiration and in some other cases may be exercised at intervals less than a year following the grant date, incentive stock options granted under our 2004, 2012 and 2019 plans may not be exercised in whole or in part within a year following the date of the grant, as these incentive stock options become exercisable in 25% increments pro ratably over the four-year period following the grant date. The options are granted at an exercise price at least equal to the fair value of the common stock at the date of grant and expire ten years from the date of grant. No options were granted under the 2004 plan after January 26, 2012, and the 2004 plan is closed other than for any options still unexercised and outstanding. No options were granted under the 2012 plan after February 1, 2019, and the 2012 plan is closed other than for any options still unexercised and outstanding. The 2019 plan is the only plan from which new share-based compensation grants may be issued. It is the Company’s policy to grant options out of the 1,000,000 shares registered under the 2019 plan.

Activity in the Company’s stock option plans is summarized in the following table. All information has been retroactively adjusted for stock dividends and stock splits.


	Year Ended December 31,
	2019			2018			2017
		Weighted			Weighted			Weighted
		Average			Average			Average
		Exercise			Exercise			Exercise
	Shares	Price		Shares	Price		Shares	Price
Outstanding at January 1, 2019	213,866	$	61.28	218,689	$	52.75	246,535	$	42.53
Granted	—		—	34,407		91.05	33,634		91.23
Exercised	(36,978)		33.26	(33,424)		30.88	(59,480)		33.03
Forfeited	—		—	(5,806)		91.35	(2,000)		26.01
Outstanding at December 31, 2019	176,888		67.14	213,866		61.28	218,689		52.75
Exercisable at December 31, 2019	131,216		60.12	140,115		49.41	148,702		41.62
Weighted-average fair value of options granted during the year		$	—		$	28.01		$	35.42

The aggregate intrinsic value of 176,888, 213,866, and 218,689 stock options outstanding at December 31, 2019, 2018, and 2017 was $3.7 million, $1.9 million, and $7.7 million, respectively. The aggregate intrinsic value of 131,216, 140,115, and 148,702 stock options exercisable at December 31, 2019, 2018, and 2017 was $3.6 million, $1.9 million, and $6.8 million, respectively. The aggregate intrinsic value of 36,978, 33,424, and 59,480 stock options exercised for the years ended December 31, 2019, 2018, and 2017 was $1.4 million, $2.0 million, and $3.3 million, respectively.

Information pertaining to options outstanding at December 31, 2019, is as follows:


					Options Outstanding					Options Exercisable
						Weighted							Weighted
						Average							Average
						Remaining		Weighted			Weighted		Remaining
Range of					Number	Contractual		Average		Number	Average		Contractual
Exercise Prices					Outstanding	Life		Exercise Price		Outstanding	Exercise Price		Life
$	26.01	-	$	40.00	20,170	1.7	years	$	31.56	20,164	$	31.56
$	40.01	-	$	55.00	19,874	2.9	years	$	41.42	19,874	$	41.42
$	55.01	-	$	70.00	74,609	5.1	years	$	63.61	68,186	$	63.59
$	70.01	-	$	85.00	—	—	years	$	—	—	$	—
$	85.01	-	$	91.35	62,235	7.6	years	$	91.12	22,992	$	91.07
					176,888	5.4	years	$	67.14	131,216	$	60.12	4.6	years

The fair value of options is estimated at the date of grant using the Black-Scholes option pricing model and expensed over the options’ vesting periods. The following weighted-average assumptions were used in valuing options issued:


	Year ended December 31,
	2019		2018		2017
Dividend yield	—	%	1.46	%	1.40	%
Expected life	—	years	8.5	years	8.5	years
Expected volatility	—	%	28.0	%	37.2	%
Risk-free interest rate	—	%	2.54	%	2.43	%

As of December 31, 2019, there was $720,000 of total unrecognized compensation cost related to non-vested stock option grants under the plans. The cost is expected to be recognized over a weighted-average period of 0.76 years as of December 31, 2019. The total fair value of shares vested during the years ended December 31, 2019, 2018 and 2017 was approximately $799,000, $700,000 and $578,000, respectively. Compensation expense of $641,000, $751,000, and $784,000 was recorded in 2019, 2018, and 2017, respectively.

Restricted Stock

The Company routinely also grants shares of restricted stock to key employees and non-employee directors. These awards help align the interests of these employees and directors with the interests of the shareholders of the Company by providing economic value directly related to increases in the value of the Company’s stock. The value of the stock awarded is established as the fair market value of the stock at the time of the grant. The Company recognizes expense, equal to the total value of such awards, ratably over the vesting period of the stock grants. Grants to employees typically cliff vest after four years. Grants to non-employee directors typically vest within a 12-month period.

All restricted stock agreements are conditioned upon continued employment. Termination of employment prior to a vesting date, as described below, would terminate any interest in non-vested shares. Prior to vesting of the shares, as long as employed by the Company, the key employees and non-employee directors will have the right to vote such shares and to receive dividends paid with respect to such shares. All restricted shares will fully vest in the event of change in control of the Company or upon the death of the recipient.

Non-vested restricted stock for the year ended December 31, 2019 is summarized in the following table. All information has been retroactively adjusted for stock dividends and stock splits.


		Weighted-
		Average
		Grant-Date
Restricted Stock	Shares	Fair Value
Nonvested at January 1, 2019	104,419	$	62.45
Granted	8,934		73.34
Vested	(40,858)		70.06
Forfeited	(3,045)		72.01
Nonvested at December 31, 2019	69,450		58.96

The Company granted 8,934; 7,836; and 26,053 shares for the years ended December 31, 2019, 2018, and 2017, respectively. The weighted-average- grant-date fair value of restricted shares granted in 2019, 2018, and 2017 was $73.34, $87.37, and $89.11, respectively. Compensation expense of $1.7 million, $2.5 million, and $2.5 million was recorded in 2019, 2018, and 2017, respectively.

The vesting schedule of these shares as of December 31, 2019 is as follows:


		Shares
2020		48,830
2021		3,905
2022		4,174
2023		4,553
2024		3,405
Thereafter		4,583
		69,450

As of December 31, 2019, there was $1.1 million of total unrecognized compensation cost related to non-vested restricted stock granted under the plans. The cost is expected to be recognized over a weighted-average period of 1.25 years as of December 31, 2019. The total fair value of shares vested during the years ended December 31, 2019, 2018 and 2017 was approximately $3.0 million, $2.5 million, and $3.1 million, respectively.

Restricted Stock Units (“RSU”)

The Company from time-to-time also grants performance RSUs to key employees. These awards help align the interests of these employees with the interests of the shareholders of the Company by providing economic value directly related to the performance of the Company. Some performance RSU grants contain a three-year performance period while others contain a one-year performance period and a time vested requirement (generally four years from grant date). The Company communicates threshold, target, and maximum performance RSU awards and performance targets

to the applicable key employees at the beginning of a performance period. Dividends are not paid in respect to the awards during the performance period. The value of the RSUs awarded is established as the fair market value of the stock at the time of the grant. The Company recognizes expenses on a straight-line basis typically over the performance and vesting periods based upon the probable performance target that will be met. For the year ended December 31, 2019, the Company accrued for 84.3% of the RSUs granted, based on Management’s expectations of performance.

Nonvested RSUs for the year ended December 31, 2019 is summarized in the following table.


		Weighted-
		Average
		Grant-Date
Restricted Stock Units	Shares	Fair Value
Nonvested at January 1, 2019	200,540	$	85.10
Granted	159,521		68.27
Vested	(31,723)		89.40
Forfeited	(3,737)		82.18
Nonvested at December 31, 2019	324,601		76.44

The Company granted 159,521, 113,270 and 77,301 shares for the year ended December 31, 2019, 2018 and 2017, respectively. The weighted-average grant-date fair value of restricted stock units granted in 2019 was $68.27. Compensation expense of $6.4 million, $5.5 million, and $3.6 million was recorded in 2019, 2018 and 2017, respectively.

As of December 31, 2019, there was $10.5 million of total unrecognized compensation cost related to nonvested RSUs granted under the plan. This cost is expected to be recognized over a weighted-average period of 1.76 years as of December 31, 2019. The total fair value of restricted stock units that vested during the years ended December 31, 2019, 2018 and 2017 was approximately $5.8 million, $5.7 million, and $5.0 million, respectively.

Employee Stock Purchase Plan

The Company has registered 363,825 shares of common stock in connection with the establishment of an Employee Stock Purchase Plan. The plan, which expires June 30, 2022, is available to all employees who have attained age 21 and completed six months of service. The Company currently has more than 50,000 shares available for issuances under the plan. The price at which common stock may be purchased for each quarterly option period is the lesser of 95% of the common stock’s fair value on either the first or last day of the quarter.

The 2002 Employee Stock Purchase Plan permits eligible employees to purchase Company stock at a discounted price. Beginning July 1, 2009, the 15% discount was reduced to 5%. The Company recognized $75,000, $82,000 and $43,000 in share-based compensation expense for the years ended December 31, 2019, 2018 and 2017, respectively.