Note 4 – Equity-Based Compensation Plans

At September 30, 2015, the Company had the following equity-based compensation plans: the First Bancorp 2014 Equity Plan, the First Bancorp 2007 Equity Plan, and the First Bancorp 2004 Stock Option Plan. The Company's shareholders approved all equity-based compensation plans. The First Bancorp 2014 Equity Plan became effective upon the approval of shareholders on May 8, 2014. As of September 30, 2015, the First Bancorp 2014 Equity Plan was the only plan that had shares available for future grants.

The First Bancorp 2014 Equity Plan is intended to serve as a means to attract, retain and motivate key employees and directors and to associate the interests of the plans' participants with those of the Company and its shareholders. The First Bancorp 2014 Equity Plan allows for both grants of stock options and other types of equity-based compensation, including stock appreciation rights, restricted stock, restricted performance stock, unrestricted stock, and performance units.

Recent equity grants to employees have either had performance vesting conditions, service vesting conditions, or both. Compensation expense for these grants is recorded over the various service periods based on the estimated number of equity grants that are probable to vest. No compensation cost is recognized for grants that do not vest and any previously recognized compensation cost will be reversed.

As it relates to director equity grants, the Company grants common shares, valued at approximately $16,000 to each non-employee director (currently eight in total) in June of each year. Compensation expense associated with these director grants is recognized on the date of grant since there are no vesting conditions. On June 1, 2015, the Company granted 8,176 shares of common stock to non-employee directors (1,022 shares per director), at a fair market value of $15.75 per share, which was the closing price of the Company's common stock on that date. On June 2, 2014, the Company granted 10,065 shares of common stock to non-employee directors (915 shares per director), at a fair market value of $17.60 per share, which was the closing price of the Company's common stock on that date.

Pursuant to an employment agreement, the Company granted the chief executive officer 75,000 non-qualified stock options and 40,000 shares of restricted stock during the third quarter of 2012. The option award would have fully vested on December 31, 2014 if the Company achieved a certain earnings target for 2014. The Company did not achieve the applicable target, and therefore, the option award was forfeited as of December 31, 2014. No compensation expense was recognized for the option award. The restricted stock award will vest in full on December 31, 2015, if the Company achieves a certain earnings target in 2015, and will be forfeited if the applicable target is not achieved. Based on current conditions, the Company has concluded that it is not probable that the restricted stock award will vest, and thus no compensation expense has been recorded.

In 2014, the Company's Compensation Committee determined that seven of the Company's senior officers would receive 50% of the bonus earned under the Company's annual incentive plan in shares of restricted stock, instead of being exclusively cash, which had been the Company's prior practice. This resulted in the Company granting a total of 14,882 shares of restricted common stock to those officers on February 24, 2015. The shares vest annually in one-third increments beginning on December 31, 2015. The total compensation expense associated with this grant was $258,000, which is being recorded over the vesting period. The Company recorded $23,300 and $69,800 in compensation expense during the three and nine months ended September 30, 2015 related to these grants.

Also, on February 24, 2015, the Company granted a total of 30,404 shares of restricted common stock to eleven senior officers. The shares vest annually in one-third increments beginning on December 31, 2015. The total compensation expense associated with this grant was $527,000, which is being recorded over the vesting period. The Company recorded $80,500 and $241,500 in compensation expense during the three and nine months ended September 30, 2015 related to these grants.

On April 10,2015, the Company granted a total of 14,425 shares of restricted common stock to five employees. The shares vest three years from the date of the grant on April 10,2018. The total compensation expense associated with this grant was $249,000, which is being recorded over the vesting period. The Company recorded $20,700 and $41,400 in compensation expense during the three and nine months ended September 30, 2015 related to these grants.

In September 2015, the Company granted a total of 5,907 shares of restricted common stock to three employees. The shares vest three years from the date of the grant. The total compensation expense associated with this grant was $100,005, which is being recorded over the vesting period. The Company recorded $2,800 in compensation expense during the three months ended September 30, 2015 related to these grants.

Based on the Company's performance in 2013, the Company granted 15,657 shares of restricted common stock to the chief executive officer on February 11, 2014 with a two year minimum vesting period. The total compensation expense associated with this grant was $278,200 and the grant will fully vest on January 1, 2016. One third of this value was expensed during each of 2013 and 2014, with the remaining one third being expensed in 2015. The Company recorded $23,200 and $69,600 in compensation expense during each of the three and nine months ended September 30, 2015 and 2014.

Under the terms of the predecessor plans and the First Bancorp 2014 Equity Plan, options can have a term of no longer than ten years, and all options granted thus far under these plans have had a term of ten years. The Company's options provide for immediate vesting under certain conditions if there is a change in control (as defined in the plans).

At September 30, 2015, there were 128,464 options outstanding under the Company's three option plans, with exercise prices ranging from $14.35 to $22.04. At September 30, 2015, there were 916,141 shares remaining available for grant under the First Bancorp 2014 Equity Plan.

The Company issues new shares of common stock when options are exercised.

The Company measures the fair value of each option award on the date of grant using the Black-Scholes option-pricing model. The Company determines the assumptions used in the Black-Scholes option pricing model as follows: the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant; the dividend yield is based on the Company's dividend yield at the time of the grant (subject to adjustment if the dividend yield on the grant date is not expected to approximate the dividend yield over the expected life of the option); the volatility factor is based on the historical volatility of the Company's stock (subject to adjustment if future volatility is reasonably expected to differ from the past); and the weighted-average expected life is based on the historical behavior of employees related to exercises, forfeitures and cancellations.

The Company recorded total stock-based compensation expense of $150,000 and $23,000 for the three months ended September 30, 2015 and 2014, respectively, and $554,000 and $248,000 for the nine months ended September 30, 2015 and 2014, respectively. Of the $554,000 in expense that was recorded in 2015, approximately $129,000 related to the June 1, 2015 director grants, which is classified as “other operating expenses” in the Consolidated Statements of Income. The remaining $425,000 in expense relates to the employee grants discussed above and is recorded as “salaries expense.” Stock based compensation is reflected as an adjustment to cash flows from operating activities on the Company's Consolidated Statement of Cash Flows. The Company recognized $216,000 and $97,000 of income tax benefits related to stock based compensation expense in the income statement for the nine months ended September 30, 2015 and 2014, respectively.

As noted above, certain of the Company's stock option grants contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period. The Company has elected to recognize compensation expense for awards with graded vesting schedules on a straight-line basis over the requisite service period for the entire award. Compensation expense is based on the estimated number of stock options and awards that will ultimately vest. Over the past five years, there have only been minimal amounts of forfeitures, and therefore the Company assumes that all awards granted without performance conditions will become vested.

The following table presents information regarding the activity for the first nine months of 2015 related to the Company's stock options outstanding:

	Options Outstanding
	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Contractual Term (years)		Aggregate Intrinsic Value

Balance at January 1, 2015		179,102		$	18.55

Granted		—			—
Exercised		(2,250	)		14.35
Forfeited		—			—
Expired		(48,388	)		20.07

Outstanding at September 30, 2015		128,464		$	18.05		2.0	$	70,000

Exercisable at September 30, 2015		128,464		$	18.05		2.0	$	70,000

During the nine months ended September 30, 2015, the Company received $32,000 as a result of stock option exercises. The Company did not have any stock option exercises during the nine months ended September 30, 2014. The Company recorded no tax benefits from the exercise of nonqualified stock options during the nine months ended September 30, 2015 or 2014.

The following table presents information regarding the activity the first nine months of 2015 related to the Company's outstanding restricted stock:

	Long-Term Restricted Stock
	Number of Units		Weighted-Average Grant-Date Fair Value

Nonvested at January 1, 2015		45,219	$	10.68

Granted during the period		65,618		17.28
Vested during the period		—		—
Forfeited or expired during the period		—		—

Nonvested at September 30, 2015		110,837	$	14.59