Stock–Based Compensation

A. General Information

The Corporation permits the issuance of stock options, dividend equivalents, performance stock awards, stock appreciation rights and restricted stock units or awards to employees and directors of the Corporation under several plans. The performance awards and restricted awards may be in the form of stock awards or stock units. Stock awards and stock units differ in that for a stock award, shares of restricted stock are issued in the name of the grantee, whereas a stock unit constitutes a promise to issue shares of stock upon vesting. The accounting for awards and units is identical. The terms and conditions of awards under the plans are determined by the Corporation’s Management Development and Compensation Committee.

Prior to April 25, 2007, all shares authorized for grant as stock-based compensation were limited to grants of stock options. On April 25, 2007, the shareholders approved the Corporation’s “2007 Long-Term Incentive Plan” (the “2007 LTIP”) under which a total of 428,996 shares of the Corporation’s common stock were made available for award grants. On April 28, 2010, the shareholders approved the Corporation’s “2010 Long Term Incentive Plan” under which a total of 445,002 shares of the Corporation’s common stock were made available for award grants, and on April 30, 2015, the shareholders approved an amendment and restatement of such plan (as amended and restated, the “2010 LTIP”) to, among other things, increase the number of shares available for award grants by 500,000 to 945,002.

In addition to the shareholder-approved plans mentioned in the preceding paragraph, the Corporation periodically authorizes grants of stock-based compensation as inducement awards to new employees. This type of award does not require shareholder approval in accordance with Rule 5635(c)(4) of the Nasdaq listing rules.

The equity awards are authorized to be in the form of, among others, options to purchase the Corporation’s common stock, restricted stock units (“RSUs”) and performance stock units (“PSUs”).

RSUs have a restriction based on the passage of time. The grant date fair value of the RSUs is based on the closing price on the date of the grant.

PSUs have a restriction based on the passage of time and also have a restriction based on a performance criteria. The performance criteria may be a market-based criteria measured by the Corporation’s total shareholder return (“TSR”) relative to the performance of the community bank index for the respective period. The fair value of the PSUs based on the Corporation’s TSR relative to the performance of a designated peer group or the NASDAQ Community Bank Index is calculated using the Monte Carlo Simulation method. The performance criteria may also be based on a non-market-based criteria such as return on average equity relative to that designated peer group. The grant date fair value of these PSUs is based on the closing price of the Corporation’s stock on the date of the grant. PSU grants may have a vesting percent ranging from 0% to 150%.

The following table summarizes the remaining shares authorized to be granted under the 2010 LTIP:



	Shares Authorized for Grant
Balance, December 31, 2015	617,765
Grants of RSUs	(33,142	)
Grants of PSUs	(45,346	)
Expiration of unexercised options	—
Non-vesting PSUs⁽¹⁾	10,088
Forfeitures of PSUs	2,344
Forfeitures of RSUs	1,250
Balance, December 31, 2016	552,959
Grants of RSUs	(40,137	)
Grants of PSUs	(41,323	)
Expiration of unexercised options	250
Non-vesting PSUs⁽¹⁾	—
Forfeitures of PSUs	3,899
Forfeitures of RSUs	4,305
Balance, December 31, 2017	479,953
Grants of RSUs	(38,806	)
Grants of PSUs	(40,722	)
Expiration of unexercised options	—
Non-vesting PSUs⁽¹⁾	—
Forfeitures of PSUs	5,679
Forfeitures of RSUs	1,515
Balance, December 31, 2018	407,619

(1) Non-vesting PSUs represent PSUs that did not meet their performance criteria, were cancelled and are available for future grant.

B. Fair Value of Options Granted

No stock options were granted or assumed during the years ended December 31, 2018, 2017 and 2016.

C. Other Stock Option Information

The following table provides information about options outstanding:



	For the Year Ended December 31,
	2018						2017						2016
	Shares		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Shares		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Shares		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Options outstanding, beginning of period	115,246		$	20.73	$	4.86	185,023		$	21.04	$	4.88	290,853		$	20.88	$	4.85
Expired	—		$	—	$	—	(250	)	$	22.00	$	4.90	—		$	—	$	—
Exercised	(64,645	)	$	22.65	$	5.00	(69,527	)	$	21.55	$	4.91	(105,830	)	$	20.61	$	7.32
Options outstanding, end of period	50,601		$	18.28	$	4.68	115,246		$	20.73	$	4.86	185,023		$	21.04	$	4.88

The following table provides information related to options as of December 31, 2018:



Range of Exercise Prices					Options Outstanding and Exercisable	Remaining Contractual Life (in years)	Weighted Average Exercise Price⁽¹⁾
$	15.48	to	$	15.75	225	0.09	$	15.48
$	15.76	to	$	17.15	338	1.07	$	16.02
$	17.16	to	$	18.30	49,475	0.64	$	18.27
$	18.31	to	$	18.33	563	5.05	$	18.33
Total Outstanding and Exercisable					50,601

(1) Price of exercisable options

For the years ended December 31, 2018, 2017 and 2016 there are no unvested options.

Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows:



	Year Ended December 31,
(dollars in thousands)	2018		2017		2016
Proceeds from strike price of value of options exercised	$	1,464	$	1,498	$	2,181
Related tax benefit recognized	312		506		256
Proceeds of options exercised	$	1,776	$	2,004	$	2,437
Intrinsic value of options exercised	$	1,512	$	1,445	$	1,125

The following table provides information about options outstanding and exercisable options:



	As of December 31,
	2018				2017				2016
(dollars in thousands, except share data and exercise price)	Options Outstanding		Exercisable Options		Options Outstanding		Exercisable Options		Options Outstanding		Exercisable Options
Number	50,601		50,601		115,246		115,246		185,023		185,023
Weighted average exercise price	$	18.28	$	18.28	$	20.73	$	20.73	$	21.03	$	21.03
Aggregate intrinsic value	$	1,478	$	1,478	$	2,705	$	2,705	$	3,908	$	3,908
Weighted average contractual term	0.7 years		0.7 years		1.2 years		1.2 years		2.0 years		2.0 years

As of December 31, 2018, all compensation expense related to stock options has been recognized.

D. RSUs and PSUs

The Corporation has granted RSUs and PSUs under the 2007 LTIP and 2010 LTIP and in accordance with Rule 5635(c)(4) of the Nasdaq listing standards.

RSUs

Compensation expense for RSUs is measured based on the market price of the stock on the day prior to the grant date and is recognized on a straight-line basis over the vesting period.

For the year ended December 31, 2018, the Corporation recognized $1.2 million of expense related to the Corporation’s RSUs. As of December 31, 2018, there was $2.4 million of unrecognized compensation cost related to RSUs. This cost will be recognized over a weighted average period of 2.6 years.

The following table details the RSUs for the years ended December 31, 2018, 2017 and 2016:



	Year Ended December 31, 2018				Year Ended December 31, 2017				Year Ended December 31, 2016
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Beginning balance	75,707		$	35.80	58,862		$	29.57	42,802		$	28.58
Granted	38,806		$	42.23	40,137		$	41.23	33,142		$	29.67
Vested	(36,252	)	$	34.38	(18,987	)	$	29.40	(15,832	)	$	27.14
Forfeited	(1,515	)	$	36.52	(4,305	)	$	29.54	(1,250	)	$	29.12
Ending balance	76,746		$	39.71	75,707		$	35.80	58,862		$	29.57

PSUs

Compensation expense for PSUs is measured based on their grant date fair value as calculated using the Monte Carlo Simulation and is recognized on a straight-line basis over the vesting period. The grant date fair value of each grant was determined independently using the Monte Carlo Simulation. Assumptions used in the Monte Carlo Simulation for the grant of 20,971 PSUs, whose performance is based on TSR, in August 2018, included expected volatility of 20.47% and a risk-free rate of interest of 2.72%.

The Corporation recognized $1.5 million of expense related to the PSUs for the year ended December 31, 2018. As of December 31, 2018, there was $3.0 million of unrecognized compensation cost related to PSUs. This cost will be recognized over a weighted average period of 2.0 years.

The following table details the PSUs for the years ended December 31, 2018, 2017 and 2016:



	Year Ended December 31, 2018				Year Ended December 31, 2017				Year Ended December 31, 2016
	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Beginning balance	168,453		$	24.76	192,844		$	18.77	216,820		$	15.07
Granted	40,722		$	44.56	41,323		$	37.86	45,346		$	28.34
Vested	(81,840	)	$	16.40	(61,815	)	$	15.05	(56,890	)	$	13.38
Non-vesting⁽¹⁾	—		$	—	—		$	—	(10,088	)	$	13.38
Forfeited	(5,679	)	$	28.79	(3,899	)	$	21.45	(2,344	)	$	15.37
Ending balance	121,656		$	36.82	168,453		$	24.76	192,844		$	18.77

(1) Non-vesting PSUs represent PSUs that did not meet their performance criteria, were cancelled and are available for future grant. The associated expense, however, was incurred over the vesting period.