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Equity-Based Compensation Plans
 12 Months Ended
Dec. 31, 2011
Equity-Based Compensation Plans  
Equity-Based Compensation Plans

Note 15. Equity-Based Compensation Plans

  

At December 31, 2011, the Company had the following equity-based compensation plans: the First Bancorp 2007 Equity Plan, the First Bancorp 2004 Stock Option Plan, the First Bancorp 1994 Stock Option Plan, and one plan that was assumed from an acquired entity. The Company’s shareholders approved all equity-based compensation plans, except for those assumed from acquired companies. The First Bancorp 2007 Equity Plan became effective upon the approval of shareholders on May 2, 2007. As of December 31, 2011, the First Bancorp 2007 Equity Plan was the only plan that had shares available for future grants.

 

The First Bancorp 2007 Equity Plan is intended to serve as a means to attract, retain and motivate key employees and directors and to associate the interests of the plans’ participants with those of the Company and its shareholders. The First Bancorp 2007 Equity Plan allows for both grants of stock options and other types of equity-based compensation, including stock appreciation rights, restricted stock, restricted performance stock, unrestricted stock, and performance units.

  

Prior to the June 17, 2008 grant (discussed below), stock option grants to employees generally had five-year vesting schedules (20% vesting each year) and had been irregular, usually falling into three categories - 1) to attract and retain new employees, 2) to recognize changes in responsibilities of existing employees, and 3) to periodically reward exemplary performance. Compensation expense associated with these types of grants is recorded pro-ratably over the vesting period. As it relates to directors, until 2010 the Company had historically granted 2,250 vested stock options to each of the Company’s non-employee directors in June of each year. In June 2011 and 2010, the Company granted 1,414 common shares and 1,039 common shares, respectively, to each non-employee director, which had approximately the same value as 2,250 stock options. Compensation expense associated with these director grants is recognized on the date of grant since there are no vesting conditions.

 

The June 17, 2008 grant of a combination of performance units and stock options have both performance conditions (earnings per share targets) and service conditions that must be met in order to vest. The 262,599 stock options and 81,337 performance units represented the maximum number of options and performance units that could have vested if the Company were to achieve specified maximum goals for earnings per share during the three annual performance periods ending on December 31, 2008, 2009, and 2010. Up to one-third of the total number of options and performance units granted were subject to vesting annually as of December 31 of each year beginning in 2010, if (1) the Company achieved specific earnings per share (EPS) goals during the corresponding performance period and (2) the executive or key employee continued employment for a period of two years beyond the corresponding performance period. Compensation expense for this grant was recorded over the various service periods based on the estimated number of options and performance units that were probable to vest. No compensation cost is recognized for awards that do not vest and any previously recognized compensation cost will be reversed. The Company did not achieve the minimum earnings per share performance goal for 2008 or 2010, and thus two-thirds of the above grant was permanently forfeited. As a result of the significant acquisition gain realized in June 2009 related to a failed bank acquisition, the Company achieved the EPS goal for 2009 and the related awards fully vested on December 31, 2011 for each grantee that remained employed through that date. The Company recorded compensation expense of $299,000 in each of 2009, 2010 and 2011 related to the vesting of these awards.

 

The Company granted long-term restricted shares of common stock to senior executives on December 11, 2009 and February 24, 2011, with vesting terms in accordance with the minimum rules for long-term equity grants for companies participating in the U.S. Treasury’s Troubled Asset Relief Program (TARP). These rules require that the vesting of the stock be tied to repayment of the financial assistance, with a two year minimum vesting period. The Company originally projected the repayment to occur five years after the date of the TARP issuance, and thus the amortization schedule for the expense was based on a repayment date of January 9, 2014. However, the Company redeemed 100% of the TARP preferred stock on September 1, 2011. Therefore, the Company recast the amortization schedule for both grants to be based on the vesting date two years after the grant. The total compensation expense associated with the December 11, 2009 grant was $398,000 and was being initially amortized over a four-year period at approximately $100,000 per year. Due to the TARP repayment, the 2009 grant fully vested on December 11, 2011. Accordingly, the Company accelerated the expense amortization and recorded a total of $298,000 for 2011. The total compensation expense associated with the February 24, 2011 grant was $105,500 and was being initially amortized over a three-year period at approximately $35,000 per year. Due to the TARP repayment, the 2011 grant will fully vest on February 24, 2013. Accordingly, the Company accelerated the expense amortization and recorded a total of $42,000 in 2011. See Note 19 for further information related to the Company’s participation in the TARP.

 

Under the terms of the Predecessor Plans and the First Bancorp 2007 Equity Plan, options can have a term of no longer than ten years, and all options granted thus far under these plans have had a term of ten years. The Company’s options provide for immediate vesting if there is a change in control (as defined in the plans).

 

At December 31, 2011, there were 489,062 options outstanding related to the three First Bancorp plans, with exercise prices ranging from $14.35 to $22.12. At December 31, 2011, there were 906,268 shares remaining available for grant under the First Bancorp 2007 Equity Plan. The Company also has a stock option plan as a result of a corporate acquisition. At December 31, 2011, there were 4,788 stock options outstanding in connection with the acquired plan, with option prices ranging from $10.66 to $15.22.

 

The Company issues new shares of common stock when options are exercised.

 

The Company measures the fair value of each option award on the date of grant using the Black-Scholes option-pricing model. The Company determines the assumptions used in the Black-Scholes option pricing model as follows: the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant; the dividend yield is based on the Company’s dividend yield at the time of the grant (subject to adjustment if the dividend yield on the grant date is not expected to approximate the dividend yield over the expected life of the option); the volatility factor is based on the historical volatility of the Company’s stock (subject to adjustment if future volatility is reasonably expected to differ from the past); and the weighted-average expected life is based on the historical behavior of employees related to exercises, forfeitures and cancellations.

 

The Company’s equity grants for the year ended December 31, 2011 were the issuance of 1) 7,259 shares of long-term restricted stock to certain senior executives on February 24, 2011, at a fair market value of $14.54 per share, which was the closing price of the Company’s common stock on that date, and 2) 21,210 shares of common stock to non-employee directors on June 1, 2011 (1,414 shares per director), at a fair market value of $11.39 per share, which was the closing price of the Company’s common stock on that date.

 

The Company’s only equity grants for the year ended December 31, 2010 were the issuance of 15,585 shares of common stock to non-employee directors on June 1, 2010 (1,039 shares per director). The fair market value of the Company’s common stock on the grant date was $15.51 per share, which was the closing price of the Company’s common stock on that date.

 

The per share weighted-average fair value of options granted during 2009 was $6.06 on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

      2009
Expected dividend yield     2.23 %
Risk-free interest rate     3.28 %
Expected life     7 years  
Expected volatility     46.32 %

 

The Company recorded total stock-based compensation expense of $905,000, $640,000 and $449,000 for the years ended December 31, 2011, 2010 and 2009, respectively. Of the $905,000 in expense that was recorded in 2011, approximately $242,000 related to the June 1, 2011 director grants, which is classified as “other operating expenses” in the Consolidated Statements of Income. The remaining $663,000 in expense relates the employee grants discussed above and is recorded as “salaries expense.” Stock based compensation is reflected as an adjustment to cash flows from operating activities on the Company’s Consolidated Statement of Cash Flows. The Company recognized $353,000, $250,000, and $180,000 of income tax benefits related to stock based compensation expense in the income statement for the years ended December 31, 2011, 2010, and 2009, respectively.

 

As noted above, certain of the Company’s stock option grants contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period. The Company has elected to recognize compensation expense for awards with graded vesting schedules on a straight-line basis over the requisite service period for the entire award. Compensation expense is based on the estimated number of stock options and awards that will ultimately vest. Over the past five years, there have only been minimal amounts of forfeitures, and therefore the Company assumes that all options granted without performance conditions will become vested.

 

The following table presents information regarding the activity since December 31, 2008 related to all of the Company’s stock options outstanding:

 

    Options Outstanding
    Number of Shares   Weighted-
Average Exercise
Price		   Weighted-
Average Contractual Term (years)		   Aggregate Intrinsic
Value
                 
Balance at December 31, 2008     828,876     $ 17.21          
                 
Granted     27,000       14.35                  
Exercised     (73,843 )     13.14             $ 251,000  
Forfeited     —       —                  
Expired     (28,917 )     11.52                  
                                 
Balance at December 31, 2009     753,116     $ 17.73                  
                                 
Granted     —       —                  
Exercised     (18,667 )     10.46             $ 97,940  
Forfeited     (87,536 )     16.53                  
Expired     (4,500 )     15.69                  
                                 
Balance at December 31, 2010     642,413     $ 18.11                  
                                 
Granted     —       —                  
Exercised     (2,300 )     13.30             $ 6,949  
Forfeited     —       —                  
Expired     (146,247 )     15.47                  
                                 
Outstanding at December 31, 2011     493,866     $ 18.92       3.7     $ 1,337  
                                 
Exercisable at December 31, 2011     420,936     $ 19.31       3.3     $ 1,337  

 

The Company received $30,000, $171,000, and $393,000 as a result of stock option exercises during the years ended December 31, 2011, 2010, and 2009, respectively. The Company recorded $0, $36,000, and $73,000 in associated tax benefits from the exercise of nonqualified stock options during the years ended December 31, 2011, 2010, and 2009, respectively.

 

The following table summarizes information about the stock options outstanding at December 31, 2011:

 

    Options Outstanding   Options Exercisable
Range of
Exercise Prices		   Number Outstanding at 12/31/11   Weighted-Average Remaining Contractual Life   Weighted- Average Exercise Price   Number Exercisable at 12/31/11   Weighted- Average Exercise Price
                     
$8.85 to $11.06     2,447       0.5     $ 10.66       2,447     $ 10.66  
$11.06 to $13.27     —       —       —       —       —  
$13.27 to $15.48     54,107       3.9       14.85       54,107       14.85  
$15.48 to $17.70     171,582       4.8       16.61       100,652       16.66  
$17.70 to $19.91     56,250       3.7       19.65       56,250       19.65  
$19.91 to $22.12     209,480       2.9       21.76       207,480       21.77  
      493,866       3.7     $ 18.92       420,936     $ 19.31  

 

As discussed above, the Company granted 81,337 performance units to 19 senior officers on June 17, 2008. Each performance unit represents the right to acquire one share of the Company’s common stock upon satisfaction of the vesting conditions (discussed above). The fair market value of the Company’s common stock on the grant date was $16.53 per share. One-third of this grant was forfeited on December 31, 2008 and another one-third was forfeited on December 31, 2010 because the Company failed to meet the minimum performance goal required for vesting. Also, as discussed above, the Company granted 29,267 and 7,259 long-term restricted shares of common stock to certain senior executives on December 11, 2009 and February 24, 2011, respectively.

 

The following table presents information regarding the activity during 2009, 2010, and 2011 related to the Company’s outstanding performance units and restricted stock:

 

    Nonvested Performance Units   Long-Term Restricted Stock
    Number of Units   Weighted-
Average
Grant-Date
Fair Value		   Number of Units   Weighted-
Average
Grant-Date
Fair Value
                 
Nonvested at December 31, 2008      54,225      $ 16.53        —     $ —  
                                 
Granted during the period     —       —       29,267     $ 13.59  
Vested during the period     —       —       —       —  
Forfeited or expired during the period     —       —       —       —  
                                 
Nonvested at December 31, 2009     54,225     $ 16.53       29,267     $ 13.59  
                                 
Granted during the period     —       —       —       —  
Vested during the period     —       —       —       —  
Forfeited or expired during the period     (27,112 )     16.53       —       —  
                                 
Nonvested at December 31, 2010     27,113     $ 16.53       29,267     $ 13.59  
                                 
Granted during the period     —       —       7,259       14.54  
Vested during the period     (27,022 )     16.53       (29,267 )     13.59  
Forfeited or expired during the period     (91 )     16.53       —       —  
                                 
Nonvested at December 31, 2011     —     $ —       7,259     $ 14.54