The Company sponsors a 401(k) plan. All employees are eligible to join the 401(k) plan. A Safe Harbor Plan was adopted by the Company effective January 1, 2007. Under the Safe Harbor Plan, the Company matches 100% of employee contributions up to 6% of compensation. In addition, the Company may make a discretionary contribution to the 401(k) plan determined on an annual basis. Employees may contribute up to 75% of their salary subject to certain limits based on federal tax laws. The expense recognized under the 401(k) plan was $781,000 and $598,000 for the years ended December 31, 2020 and 2019, respectively.

The Company has Supplemental Executive Retirement Agreements with certain executive officers. These agreements are designed to supplement the benefits available through the Company’s retirement plan. The liability for the retirement benefits amounted to $9.1 million and $7.8 million at December 31, 2020 and 2019, respectively, and is included in other liabilities. The expense recognized for these benefits was $1.3 million and $1.0 million for the years ended December 31, 2020 and 2019, respectively.

Employee Stock Ownership Plan

Old Provident established an ESOP to provide eligible employees the opportunity to own Old Provident stock. The plan is a tax-qualified plan for the benefit of all eligible Bank employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax law limits. The ESOP acquired 721,876 shares in Old Provident’s initial stock offering with the proceeds of a loan totaling $3.6 million. The loan was payable annually over 15 years at a rate per annum equal to the prime rate. In conjunction with the Conversion, the Company refinanced the original loan to the ESOP with an additional $8.2 million payable over 15 years at a rate per annum equal to the prime rate (3.25% and 4.75% as December 31, 2020 and 2019, respectively) to acquire an additional 816,992 shares at $10.00 per share, representing 8% of the shares sold in the Company’s second-step offering. After the Conversion, the unallocated shares had an average price of $8.01 per share. Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid. The number of shares committed to be released per year through 2033 is 89,757.

Shares held by the ESOP include the following:




	December 31, 2020	December 31, 2019
Allocated	282,256	192,499
Committed to be allocated	89,758	89,757
Unallocated	1,166,854	1,256,612
Total	1,538,868	1,538,868

The fair value of unallocated shares was approximately $14.0 million at December 31, 2020.

Total compensation expense recognized for the years ended December 31, 2020 and 2019 was $841,000 and $1.1 million respectively.

Stock-Based Compensation Plan

The shareholders of the Company approved the Provident Bancorp, Inc. 2020 Equity Incentive Plan (the “2020 Equity Plan”) on November 23, 2020, which is in addition to the Provident Bancorp, Inc. 2016 Equity Incentive Plan (the "2016 Equity Plan"), (collectively called the “Equity Incentive Plans”). Under the Equity Incentive Plans the Company may grant options, restricted stock, restricted units or performance awards to its directors, officers and employees. Both incentive stock options and non-qualified stock options may be granted under the Equity Incentive Plans, with 902,344 and 1,021,239 shares reserved for options under the 2016 Equity Plan and 2020 Equity Plan, respectively. The exercise price of each option equals the market price of the Company’s stock on the date of grant and the maximum term of each option is ten years. The total number of shares reserved for restricted stock or restricted units is 360,935 and 408,495 under the 2016 Equity Plan and 2020 Equity Plan, respectively. The value of restricted stock grants is based on the market price of the stock on grant date. Options and awards vest ratably over 3 to 5 years.

Expense related to options and restricted stock granted to directors is recognized as directors' fees within non-interest expense.

Stock Options

The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:

Expected volatility is based on historical volatility of the Company’s common stock price.

Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term, and the vesting period.

The dividend yield assumption is based on the Company’s expectation of dividend payouts.

The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.

The fair value of options granted was determined using the following weighted-average assumptions as of grant date.



	2020			2019
Expected volatility		34.63	%		31.15	%
Expected life (years)		7.5			7.5
Expected dividend yield		1.04	%		—	%
Risk free interest rate		0.66	%		1.83	%
Fair value per option	$	3.79		$	4.80

A summary of the status of the Company’s stock option grants for the year ended December 31, 2020, is presented in the table below:



	Stock Option Awards		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term ‎(years)	Aggregate Intrinsic Value
Outstanding at January 1, 2020		816,057	$	8.93
Granted		838,518		11.52
Forfeited		(9,844)		8.61
Exercised		—		—
Outstanding at December 31, 2020		1,644,731	$	10.25	7.97	$	2,934,571
Outstanding and expected to vest at December 31, 2020		1,644,731	$	10.25	7.97	$	2,934,571
Vested and Exercisable at December 31, 2020		626,258	$	8.79	5.83	$	2,028,370
Unrecognized compensation cost	$	3,583,000
Weighted average remaining recognition period (years)		4.30

Total expense for the stock options was $462,000 and $406,000 for the years ended December 31, 2020 and 2019, respectively.

Shares issued upon the granting of restricted stock may come from authorized but unissued shares or reacquired shares held by the Company. Any shares forfeited because vesting requirements are not met will again be available for issuance under the Equity Plan. The fair market value of shares awarded, based on the market prices at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period.

The following table presents the activity in unvested restricted stock awards under the Equity Plan for the year ended December 31, 2020:



			Weighted
	Number of		Average
	Shares		Grant Price
Unvested restricted stock awards at January 1, 2020		140,019	$	9.19
Granted		315,707		11.49
Forfeited		(3,938)		8.61
Vested		(64,105)		8.98
Unvested restricted stock awards at December 31, 2020		387,683	$	11.10
Unrecognized compensation cost	$	4,175,000
Weighted average remaining recognition period (years)		4.25

Total expense for the restricted stock awards was $627,000 and $593,000 for the years ended December 31, 2020 and 2019, respectively. The total fair value of shares vested during the years ended December 31, 2020 and 2019 was $631,000 and $757,000, respectively.