(3) Stock-Based Compensation

The Company accounts for stock-based compensation issued to employees, and when appropriate, non-employees, in accordance with the fair value recognition provisions of FASB ASC 718, Compensation – Stock Compensation (“FASB ASC 718”). Under the fair value provisions of FASB ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and it is recognized as expense over the appropriate vesting period using the straight-line method. However, consistent with FASB ASC 718, the amount of stock-based compensation cost recognized at any date must at least equal the portion of the grant date value of the award that is vested at that date and, as a result, it may be necessary to recognize the expense using a ratable method. Although the provisions of FASB ASC 718 should generally be applied to non-employees, FASB ASC 505-50, Equity-Based Payments to Non-Employees, is used in determining the measurement date of the compensation expense for non-employees.

Determining the fair value of stock-based awards at the measurement date requires judgment, including estimating the expected term of the stock options and the expected volatility of the Company’s stock. In addition, judgment is required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key assumptions are used, it could have a material effect on the Company’s unaudited condensed consolidated financial statements.

The Company’s stock-based incentive plan authorizes the issuance of shares of common stock pursuant to awards that may be granted in the form of stock options to purchase common stock (“Options”) and awards of shares of (or share units with respect to) common stock (“Stock Awards”). The purpose of the Company’s stock-based incentive plan is to give the Company a competitive advantage in attracting, retaining, and motivating officers, employees, directors, and consultants and to provide the Company and its subsidiaries and affiliates with a compensation plan providing incentives for future performance of services directly linked to the profitability of the Company’s businesses and increases in Company shareholder value. Under the Company’s stock-based incentive plan, Options expire ten years after the date of grant, unless terminated earlier under the Option’s terms. For both Options and Stock Awards, a committee of independent directors has the authority to determine the conditions upon which the Options or Stock Awards granted will vest.

In March 2015, the Board of Directors of the Company approved the Sun Bancorp, Inc. 2015 Omnibus Stock Incentive Plan (the “2015 Plan”). The purpose of the 2015 Plan is to give the Company a competitive advantage in attracting, retaining and motivating officers, employees, directors and consultants who will contribute toward the growth, profitability and success of the Company by providing stock-based incentives that offer an opportunity to participate in the Company’s future performance and to align the interests of such officers, employees, directors and/or consultants with those of the shareholders of the Company.

The 2015 Plan, which was approved by shareholders in May 2015, became effective in May 2015, at which time the Company ceased new grants under the 2014 Performance Equity Plan, the 2010 Plan, and the 2004 Plan (each as defined below and collectively, the “Prior Plans”). Any awards outstanding under the Prior Plans remain in full force and effect under such plans according to their respective terms. The 2015 Plan authorizes the issuance of 1,400,000 shares of common stock pursuant to awards that may be granted in the form of Options and Stock Awards. For the purpose of calculating the number of shares available for issuance under the 2015 Plan, each issued Option equals one share and each issued Stock Award equals two shares. Under the 2015 Plan, Options expire ten years after the date of grant, unless terminated earlier under the option terms. For both Options and Stock Awards, a Committee of independent directors has the authority to determine the conditions upon which the Options or Stock Awards granted will vest. At March 31, 2017, there were 123,739 Options and 285,541 Stock Awards granted under the 2015 Plan.

Activity in the Company’s stock option plans for the three months ended March 31, 2017 and March 31, 2016 was as follows:

Summary of Options Activity

				Weighted
	Number			Average		Number
	of			Exercise		of Options
	Options			Price		Exercisable
Outstanding as of January 1, 2017		571,883		$	22.37		234,564
Granted		—			—		—
Exercised		(3,133	)		18.41		—
Forfeited		(1,627	)		19.46		—
Expired		(3,824	)		26.15		—
Outstanding as of March 31, 2017		563,299		$	22.46		288,366
Options vested or expected to vest⁽¹⁾		417,637		$	19.64		—

(1)	Includes vested Options and nonvested Options after the application of a forfeiture rate, which is based upon historical data.

				Weighted
	Number			Average		Number
	of			Exercise		of Options
	Options			Price		Exercisable
Outstanding as of January 1, 2016		509,097		$	23.84		163,443
Granted		123,739			21.08		—
Exercised		(110	)		16.80		—
Forfeited		(12,619	)		26.19		—
Expired		—			—		—
Outstanding as of March 31, 2016		620,107		$	23.24		—
Options vested or expected to vest⁽¹⁾		464,458		$	24.44		—

(1)	Includes vested Options and nonvested Options after the application of a forfeiture rate, which is based upon historical data.

The weighted average remaining contractual term was approximately 6.9 years for Options outstanding and 5.5 years for Options exercisable as of March 31, 2017.

At March 31, 2017, the aggregate intrinsic value was $2.3 million for Options outstanding and $1.0 million for Options exercisable.

As of March 31, 2017, the Company has granted 123,739 Options pursuant to the 2015 Plan, zero of which were granted during the three months ended March 31, 2017. In accordance with FASB ASC 718, the fair value of the Options granted are estimated on the date of grant using the Black-Scholes option pricing model which uses the assumptions in the table below. The expected term of an Option is estimated using historical exercise behavior of employees at a particular level of management who were granted Options with a comparable term. The Options have historically been granted with a ten year term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility is based on the historical volatility of the Company’s stock price.

Significant weighted average assumptions used to calculate the fair value of the Options granted during the three months ended March 31, 2017 and 2016 are as follows:

	For the Three
	Months Ended
	March 31,
	2017		2016
Weighted average fair value of Options granted	$	—	$	5.90
Weighted average risk-free rate of return		—		1.29	%
Weighted average expected option life in months		—		50
Weighted average expected volatility		—		33	%
Expected dividends⁽¹⁾	$	—	$	—

(1)	The fair value of future grants of Options will be impacted by the issuance of quarterly cash dividends.

A summary of the Company’s nonvested Stock Award activity during the three months ended March 31, 2017 and 2016 are presented in the following tables:

Summary of Nonvested Stock Award Activity

				Weighted
				Average
				Grant
	Number			Date
	of			Fair
	Shares			Value
Nonvested Stock Awards outstanding, January 1, 2017		254,976		$	20.18
Issued		102,710			26.16
Vested		(13,013	)		16.80
Forfeited		(940	)		19.21
Nonvested Stock Awards outstanding, March 31, 2017		343,733		$	21.85

				Weighted
				Average
				Grant
	Number			Date
	of			Fair
	Shares			Value
Nonvested Stock Awards outstanding, January 1, 2016		279,964		$	18.42
Issued		48,158			15.17
Vested		(1,429	)		16.80
Forfeited		(8,813	)		14.61
Nonvested Stock Awards outstanding, March 31, 2016		317,880		$	18.04

There were 102,710 shares of nonvested Stock Awards issued during the three months ended March 31, 2017 and 48,158 nonvested Stock Awards issued during the three months ended March 31, 2016. The value of these shares is based upon the closing price of the Company’s common stock on the date of grant. Compensation expense is recognized on a straight-line basis over the service period for all of the nonvested Stock Awards issued.

Total compensation expense recognized related to Options and nonvested Stock Awards, including that for non-employee directors, during the three months ended March 31, 2017 and 2016 was $720 thousand and $553 thousand, respectively. As of March 31, 2017, there was approximately $6.6 million of total unrecognized compensation cost related to Options and nonvested Stock Awards. The cost of the Options and Stock Awards is expected to be recognized over a weighted average period of 2.9 years and 2.7 years, respectively.