Note 12: Stock Based Compensation

ESOP

Employees participate in an Employee Stock Ownership Plan ("ESOP"). The ESOP borrowed funds from the Company to purchase 431,836 shares of stock at $10 per share. The Bank makes discretionary contributions to the ESOP, as well as paying dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation. Participants receive the shares at the end of employment. Dividends on allocated shares increase participants accounts. 

There were no contributions to the ESOP during the first nine months of 2023, as the annual loan payment will be made during the fourth quarter. Expense recorded was $50,000 and $48,000 for the three months ended September 30, 2023 and 2022, respectively, and $152,000 and $151,000 for the nine months ended September 30, 2023 and 2022, respectively, and is recognized over the service period. 

Shares held by the ESOP were as follows: 

Fair value of unearned shares is based on a stock price of $9.05 and $10.82 as of September 30, 2023 and 2022, respectively. 

Equity Incentive Plan

At the Company's annual meeting of stockholders held on May 24, 2023, stockholders approved the NSTS Bancorp, Inc. 2023 Equity Incentive Plan (“2023 Equity Plan”), which provides for the granting of up to 755,714 shares (215,918 shares of restricted stock and 539,796 stock options) of the Company’s common stock pursuant to equity awards made under the 2023 Equity Plan.

Stock options granted under the 2023 Equity Plan generally vest in equal annual installments over a service period of five years beginning one year from the date of grant. The vesting of the options accelerates upon death, disability or an involuntary termination at or following a change in control of the Company. Stock options are generally granted at an exercise price equal to the fair value of the Company’s common stock on the grant date based on the closing market price of the Company's common stock on the date of grant, and have an expiration period of ten years. In June 2023, the Company granted 465,500 stock options under the 2023 Equity Plan. As of September 30, 2023, the Company has 74,296 stock options available for future grants under the 2023 Equity Plan.  

The fair value of stock options granted is estimated utilizing the Black-Scholes option pricing model using the following assumptions: an expected life of 6.5 years, risk-free rate of 3.82%, volatility of 29.0% and a dividend yield of 0.0%. Due to the limited historical information of the Company’s stock, management considered the weighted historical volatility of the common stock of the Company and other similar entities for an appropriate period in determining the volatility rate used in the estimation of fair value. The expected life of the stock option was estimated using the simplified method. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of the awards. Upon exercise of vested options, management expects to draw on treasury stock as the source for shares. There were no stock options granted during the three months ended September 30, 2023. The weighted average grant date fair value of stock options granted during the nine months ended September 30, 2023 was $3.56.

The following table presents the stock based compensation expense for the periods presented. 

The following is a summary of the Company's stock option activity and related information for the periods presented. There was no stock option activity for the three and nine months ended September 30, 2022. 

Expected future expense relating to the non-vested options outstanding as of September 30, 2023 is $1.6 million over a weighted average period of 4.7 years. 

Restricted shares granted under the 2023 Equity Plan generally vest in equal annual installments over a service period of five years beginning one year from the date of grant. The vesting of the awards accelerates upon death, disability or an involuntary termination at or following a change in control of the Company. The product of the number of shares granted and the grant date closing market price of the Company’s common stock determines the fair value of restricted shares under the 2023 Equity Plan. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period.

On June 15, 2023, the Company granted to employees, under the 2023 Equity Plan, 187,200 shares of restricted stock with a total grant-date fair value of $1.8 million. These restricted stock awards vest in equal installments over a five-year period beginning one year from the date of grant. There were no shares of restricted stock granted during the three months ended September 30, 2023. As of September 30, 2023, the Company has 28,718 shares of restricted stock available for future grants under the 2023 Equity Plan. 

The following is a summary of the status of the Company's restricted shares as of September 30, 2023 and changes thereto during the periods presented.  

Expected future expense related to the non-vested restricted shares outstanding as of period end is $1.6 million over a weighted average period of 4.7 years.