Note 22 – Share-Based Compensation

On January 21, 2003, the Board of Directors adopted the Horizon Bancorp 2003 Omnibus Equity Incentive Plan (“2003 Plan”), which was approved by stockholders on May 8, 2003. Under the 2003 Plan, Horizon could issue up to 506,250 common shares, plus the number of shares that are tendered to or withheld by Horizon in connection with the exercise of options plus that number of shares that are purchased by Horizon with the cash proceeds received upon option exercises. The 2003 Plan limited the number of shares available to 506,250 for incentive stock options and to 253,125 for the grant of non-option awards. The shares available for issuance under the 2003 Plan could be divided among the various types of awards and among the participants as the Compensation Committee (“Committee”) determines. The Committee was authorized to grant any type of award to a participant that was consistent with the provisions of the 2003 Plan. Awards could consist of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units, performance shares or any combination of these awards. The Committee determined the provisions, terms and conditions of each award. The restricted shares vest over a period of time established by the Committee at the time of each grant. Holders of restricted shares receive dividends and may vote the shares. The restricted shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity. The cost of these shares is being amortized against earnings using the straight-line method over the vesting period. The options shares granted under the 2003 plan vest at a rate designated per the individual agreements. The restricted shares granted under the 2003 Plan vest at the end of each grant’s vesting period. On March 8, 2010, the Board of Directors adopted, and on May 6, 2010, the stockholders approved, an amendment to the 2003 Omnibus Equity Incentive Plan making an additional 590,625 common shares available for issuance. All share data has been adjusted for the 3:2 stock split on November 14, 2016 (and for three additional stock splits in 2003, 2011 and 2012 after the 2003 Plan was adopted).

A summary of option activity under the 2003 Plan as of December 31, 2017, and changes during the year then ended, is presented below:


						Weighted-
						Average
				Weighted-		Remaining		Aggregate
				Average		Contractual		Intrinsic
	Shares			Exercise Price		Term		Value
Outstanding, beginning of year		36,635		$	7.25
Granted		—			—
Exercised		(9,185	)		6.86
Forfeited		—			—

Outstanding, end of year		27,450			7.37		2.73	$	560,691

Exercisable, end of year		27,450			7.37		2.73		560,691

On June 18, 2013, the Board of Directors adopted the Horizon Bancorp 2013 Omnibus Equity Incentive Plan (“2013 Plan”), which was approved by the Company’s shareholders on May 8, 2014. Under the 2013 Plan, Horizon may issue up to 1,037,550 common shares, plus the number of shares that are tendered to or withheld by Horizon in connection with the exercise of options plus that number of shares that are purchased by Horizon with the cash proceeds received upon option exercises. The 2013 Plan limits the number of shares available to 150,000 for incentive stock options and to 600,000 for the grant of non-option awards. The shares available for issuance under the 2013 Plan may be divided among the various types of awards and among the participants as the Committee determines. The Committee is authorized to grant any type of award to a participant that is consistent with the provisions of the 2013 Plan. Awards may consist of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance units, performance shares or any combination of these awards. The Committee determines the provisions, terms and conditions of each award. All share data has been adjusted for the 3:2 stock split on November 14, 2016.

The restricted shares can vest over a period of time established by the Committee at the time of each grant, but the restricted shares already granted under the 2013 Plan generally vest at the end of each grant’s vesting period. Holders of restricted shares receive dividends and may vote the shares. The restricted shares are recorded at fair market value (on the date granted) as a separate component of stockholders’ equity. The cost of these shares is being amortized against earnings using the straight-line method over the vesting period.

The performance shares that are awarded become earned and vested based on the achievement of certain performance goals during a performance period as established by the Committee at the time of each grant. The performance goals are based on a comparison of the Company’s average performance over the performance period for the return on common equity, compounded annual growth rate of total assets, and return on average assets, all as relative to the average performance for publicly traded banks with total assets between $1 billion and $5 billion on the SNL Bank Index. Holders of performance share awards receive pass-through dividends but do not have any voting rights before the performance shares are earned and vested.

The options shares granted under the 2013 Plan vest at a rate designated per the individual agreements.

The fair value of options granted is estimated on the date of the grant using an option-pricing model with the following weighted-average assumptions:


December 31	2017			2016			2015
Dividend yields		1.75	%		2.34	%		2.35	%
Volatility factors of expected market price of common stock		28.52	%		28.60	%		28.97	%
Risk-free interest rates		2.42	%		1.83	%		2.10	%
Expected life of options		8 years			8 years			8 years

A summary of option activity under the 2013 Plan as of December 31, 2017, and changes during the year then ended, is presented below:


						Weighted-
						Average
				Weighted-		Remaining		Aggregate
				Average		Contractual		Intrinsic
	Shares			Exercise Price		Term		Value
Outstanding, beginning of year		286,586		$	15.08
Granted		43,502			25.14
Exercised		(108,434	)		14.77
Forfeited		(5,871	)		15.64

Outstanding, end of year		215,783			17.25		7.69	$	2,276,823

Exercisable, end of year		88,036			14.77		6.62		1,147,538

The weighted average grant-date fair value of options granted during the years 2017, 2016 and 2015 was $7.25, $3.89 and $4.09.

A summary of the status of Horizon’s non-vested restricted and performance shares as of December 31, 2017 are presented below:


				Weighted
				Average
				Grant Date
	Shares			Fair Value
Non-vested beginning of year		70,959		$	15.59
Vested		(6,754	)		14.80
Granted		41,786			25.49
Forfeited		(9,461	)		15.05

Non-vested, end of year		96,530			19.98

Grants vest at the end of three, four or five years of continuous employment.

Total compensation cost recognized in the income statement for option-based payment arrangements during 2017 was $325,000 and the related tax benefit recognized was approximately $114,000. Total compensation cost recognized in the income statement for option-based payment arrangements during 2016 and 2015 was $324,000 and $288,000 and the related tax benefit recognized was $113,000 and $101,000, respectively.

Total compensation cost recognized in the income statement for restricted share and performance share based payment arrangements during 2017, 2016 and 2015 was $135,000, $284,000, and $355,000. The recognized tax benefit related thereto was approximately $47,000, $99,000, and $124,000 for the years ended December 31, 2017, 2016 and 2015.

Cash received from option exercise under all share-based payment arrangements for the years ended December 31, 2017, 2016 and 2015 was $1.6 million, $214,000, and $403,000. The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $522,000, $158,000, and $151,000, for the years ended December 31, 2017, 2016 and 2015.

As of December 31, 2017, there was $911,000 of total unrecognized compensation cost related to all non-vested share-based compensation arrangements granted under all of the plans. That cost is expected to be recognized over a weighted-average period of 1.5 years. Under all plans, forfeitures of share-based compensation grants are recognized as they occur.

On December 19, 2017, the Board of Directors proposed adoption of the Amended and Restated 2013 Omnibus Equity Incentive Plan, primarily to allow awards of “Other Stock Based Awards,” which includes awards valued in whole or in part by reference to Horizon’s common shares. The Amended and Restated 2013 Omnibus Equity Incentive Plan must be approved by the shareholders in order to become effective, and the shareholders will vote on its adoption at the Annual Meeting to be held on May 3, 2018.