SHARE-BASED COMPENSATION

Under the Blue Hills Bancorp, Inc. 2015 Equity Incentive Plan (the "Equity Plan"), 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 Plan, with the total shares reserved for options equaling 2,846,681. Board members may only receive non-qualified stock options. 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. A total of 1,138,673 shares are reserved for awards of restricted stock or restricted units. The vast majority of options and awards vest ratably over five years. The fair value of shares awarded is based on the market price at the date of grant.

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

The Company has standard form agreements used for stock option and restricted stock awards. The standard form agreements used for the Chief Executive Officer and all other Executive Officers have previously been disclosed in Securities and Exchange Commission filings and generally provide that: (1) any unvested options or unvested restricted stock vest upon a Change in Control; and, that (2) any stock options which vest pursuant to a Change in Control, which is an event described in Section 280G of the Internal Revenue Code of 1986, will be cashed out at the difference between the acquisition price and the exercise price of the stock option.

Stock Options

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


•	Volatility is based on peer group volatility because the Company does not have a sufficient trading history.


•	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.


•	Expected dividend yield is based on the Company's history and 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 Company made the following awards of options to purchase shares of common stock during the three months ended March 31, 2018:



Options granted	145,000
Vesting period (years)	5
Term (years)	10
Fair value calculation assumptions:
Expected volatility	26.47	%
Expected life (years)	6.5
Expected dividend yield	3.21	%
Risk free interest rate	2.39	%
Weighted average grant date fair value	$4.12

A summary of the status of the Company's stock option grants for the three months ended March 31, 2018, is presented in the table below:



	Stock Option Awards			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Outstanding at December 31, 2017	2,684,650			$	14.70
Granted	145,000			20.70
Forfeited	(73,500		)	14.07
Exercised	(36,330		)	13.99			$	255,000
Outstanding at March 31, 2018	2,719,820			$	15.04	7.76	$	15,794,000
Exercisable at March 31, 2018	977,250			$	14.38	7.31	$	6,327,000
Unrecognized compensation cost inclusive of directors' options at March 31, 2018	$	6,692,000
Weighted average remaining recognition period (years)	3.05

For the three months ended March 31, 2018 and 2017, share-based compensation expense applicable to the stock options was $572,000 and $610,000, respectively, and the recognized tax benefit related to this expense was $102,000 and $156,000, respectively.

Restricted Stock

Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company. Any shares not issued because vesting requirements are not met will again be available for issuance under the plan. The fair market value of shares awarded, based on the market price at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period. Of the restricted shares granted to date, 40,000 are performance based, of which 12,000 have vested, 4,000 have been forfeited and 24,000 remain unvested. There were 2,000 performance shares forfeited during the three months ended March 31, 2018.

The following table presents the activity in non-vested stock awards under the Equity Plan for the three months ended March 31, 2018:



	Outstanding Restricted Stock Awards		Weighted Average Grant Price

Nonvested stock awards at December 31, 2017	730,420		$	15.11
Granted	36,500		20.70
Vested	(48,749	)	17.03
Forfeited	(23,000	)	14.07
Nonvested stock awards at March 31, 2018	695,171		$	15.31
Unrecognized compensation cost inclusive of directors' awards at March 31, 2018	$9,367,000
Weighted average remaining recognition period (years)	3.09

For the three months ended March 31, 2018 and 2017, share-based compensation expense applicable to restricted stock awards was $777,000 and $798,000, respectively, and the recognized tax benefit related to this expense was $202,000 and $305,000, respectively.