Stock-Based Compensation

6 Months Ended

Jun. 30, 2011

Stock-Based Compensation

Stock-Based Compensation

(3) Stock-Based Compensation

The fair value of all new and modified awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period. Forfeiture estimates are based on historical experience.

Bancorp currently has one stock-based compensation plan.  Initially, in the 2005 Stock Incentive Plan, there were 735,000 shares of common stock reserved for issuance of stock based awards.  In 2010, shareholders approved a proposal to amend the 2005 Stock Incentive Plan to reserve an additional 700,000 shares of common stock for issuance under the plan. As of June 30, 2011, there were 668,820 shares available for future awards. Bancorp’s 1995 Stock Incentive Plan expired in 2005; however, options granted under this plan expire as late as 2015.

Options and stock appreciation rights (SARs) granted generally have been subject to a vesting schedule of 20% per year.  Prior to 2009, equity grants to certain executive officers vested six months after grant date. Restricted shares generally vest over three to five years.   All awards under both plans have been granted at an exercise price equal to the market value of common stock at the time of grant; options and SARs expire ten years after the grant date.

In April 2011, the Board of Directors of Bancorp approved an amendment to the 2005 Stock Incentive Plan to authorize restricted stock units (RSUs) as a type of award that the Company may grant pursuant to the Plan. The RSU awards entitle those officers to issuance of one share of common stock for each vested RSU shortly after expiration of a three-year performance period, provided certain goals are achieved.  Executives do not have voting rights and do not receive dividends or other distributions paid on stock related to RSUs, until that stock is actually issued.

Bancorp has recognized stock-based compensation expense, within salaries and employee benefits in the consolidated statements of income, as follows:

	For three months ended				For six months ended
	June 30,				June 30,
	2011		2010		2011		2010
Stock-based compensation expense before income taxes	$	316,000	$	247,000	$	564,000	$	455,000
Deferred tax benefit	110,000		86,000		197,000		159,000
Reduction of net income	$	206,000	$	161,000	$	367,000	$	296,000

Bancorp expects to record an additional $662,000 of stock-based compensation expense in 2011 for equity grants outstanding as of June 30, 2011.  As of June 30, 2011, Bancorp has $3,503,000 of unrecognized stock-based compensation expense that will be recorded as compensation expense over the next five years as awards vest.  Bancorp received cash of $369,000 and $429,000 from the exercise of options during the first six months of 2011 and 2010, respectively.

The fair value of Bancorp’s stock options and SARs is estimated at the date of grant using the Black-Scholes option pricing model, a leading formula for calculating the value of stock options.  This model requires the input of subjective assumptions, changes to which can materially affect the fair value estimate.  The fair value of restricted shares is determined by Bancorp’s closing stock price on the date of grant. The fair value of restricted stock units is determined by Bancorp’s closing stock price on the date of the award, less the present value of dividends expected to be paid during the performance period.

The following assumptions were used in SAR/option valuations at the grant date in each year:

	2011		2010
Dividend yield	2.48	%	2.18	%
Expected volatility	22.64		23.87
Risk free interest rate	2.90		3.57
Forfeitures	6.07		5.96
Expected life of options and SARs (in years)	7.5		7.6

The dividend yield and expected volatility are based on historical information corresponding to the expected life of options and SARs granted.  The expected volatility is the volatility of the underlying shares for the expected term on a monthly basis.  The risk free interest rate is the implied yield currently available on U. S. Treasury issues with a remaining term equal to the expected life of the options.

All outstanding options have a 10-year contractual term from the date of grant.  The expected life of options is based on actual experience of past like-term awards.  Bancorp evaluated historical exercise and post-vesting termination behavior when determining the expected life of options and SARs.

A summary of stock option and SARs activity and related information for the six months ended June 30, 2011 follows.  The number of options and SARs and aggregate intrinsic value are stated in thousands.

											Weighted
					Weighted				Weighted		Average
					Average		Aggregate		Average		Remaining
	Options				Exercise		Intrinsic		Fair		Contractual
	and SARs		Exercise Price		Price		Value		Value		Life
At December 31, 2010
Vested and exercisable	710		$	16.00-26.83	$	22.03	$	2,007	$	4.91	4.15
Unvested	273		21.03-26.83		22.85		552		5.36		7.72
Total outstanding	983		16.00-26.83		22.26		2,559		5.03		5.14
Granted	67		23.76-24.87		23.78		—		5.04
Exercised	(46	)	16.00-22.81		16.93		323		3.47
Forfeited	(9	)	18.05-26.83		21.54		18		4.85
At June 30, 2011
Vested and exercisable	755		16.00-26.83		22.55		1,090		5.07		4.10
Unvested	240		21.03-26.83		22.82		211		5.22		8.20
Total outstanding	995		16.00-26.83		22.61		$	1,301	5.11		5.09
Vested during year	95		21.03-26.83		23.59		$	59	5.48

Intrinsic value for stock options is defined as the amount by which the current market price of the underlying stock exceeds the exercise price.

In the first quarter of 2011, Bancorp granted 66,579 SARs at the weighted average current market price of $23.78 and a Black-Scholes fair value of $5.04.  There were no SARs granted in the second quarter.  In the first six months of 2011, Bancorp granted 41,991 shares of restricted common stock at the weighted average current market price of $23.96.  Also in the second quarter of 2011, Bancorp awarded RSUs with a fair value of $21.99 to executive officers of the Bank, the three-year performance period for which began January 1, 2011. Bancorp believes, based on most recent analysis, the most likely vesting of these RSUs will be 20,228 shares of common stock.