(15) 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 December 31, 2012, there were 580,467 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. 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 unless forfeited due to employment termination.

As required, Bancorp reduces future stock-based compensation expense by estimated forfeitures at the grant date. These forfeiture estimates are based on historical experience. Bancorp has recognized stock-based compensation expense, within salaries and employee benefits in the consolidated statements of income, as follows:

	2012		2011		2010
Stock-based compensation expense before income taxes	$	1,481,000	$	1,165,000	$	952,000
Deferred tax benefit	518,000		408,000		333,000
Reduction of net income	$	963,000	$	757,000	$	619,000

As of December 31, 2012 Bancorp has $3,149,000 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 $937,000, $692,000 and $785,000 from the exercise of options during 2012, 2011 and 2010, respectively.

The fair value of Bancorp’s stock options and SARs are estimated at the date of grant using the Black-Scholes option pricing model, a leading formula for calculating the value of stock options and SARs. 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 following assumptions were used in option and SAR valuations:

Assumptions	2012		2011		2010

Dividend yield	2.52	%	2.48	%	2.18	%
Expected volatility	22.04	%	22.64	%	23.87	%
Risk free interest rate	1.44	%	2.90	%	3.57	%
Forfeitures	4.20	%	6.07	%	5.96	%
Expected life of options (in years)	7.60		7.50		7.60

The expected life of options and SARs is based on actual experience of past like-term options. Bancorp evaluated historical exercise and post-vesting termination behavior when determining the expected life for options granted during 2012, 2011 and 2010. 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 price 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.

A summary of stock option and SARs activity and related information for the year ended December 31, 2012 follows.

											Weighted
					Weighted				Weighted		average
					average		Aggregate		average		remaining
	Options		Exercise price		exercise		intrinsic		fair		contractual
(in thousands, except price and years)	and SARs		per share		price		value		value		life (years)

At December 31, 2011
Vested and exercisable	681		$	18.62-26.83	$	22.94	$	160	$	5.18	3.9
Unvested	232		21.03-26.83		22.80		—		5.22		7.7
Total outstanding	913		18.62-26.83		22.90		160		5.19		4.9

Granted	99		22.86-23.58		22.87		78		3.93
Exercised	(71	)	18.62-23.37		18.78		305		3.85
Forfeited	(14	)	20.71-26.83		23.67		2		5.21

At December 31, 2012
Vested and exercisable	681		20.17-26.83		23.42		271		5.33		3.5
Unvested	246		21.03-26.83		22.62		77		4.67		7.9
Total outstanding	927		20.17-26.83		23.21		$	348	5.15		4.7

Vested during year	80		21.03-26.83		23.45		$	28	5.33

Intrinsic value for stock options is defined as the amount by which the current market price of the underlying stock exceeds the exercise price. The aggregate intrinsic value of stock options and SARs exercised in 2012, 2011 and 2010 was $305,000, $524,000 and $1,122,000, respectively. The aggregate intrinsic value of stock options exercised was calculated as the difference in the closing price of Bancorp’s common shares on the date of exercise and the exercise price, multiplied by the number of shares exercised.

The weighted average Black-Scholes fair values of options and SARs granted in 2012, 2011 and 2010 were $3.93, $5.04 and $5.31, respectively.

In 2012, Bancorp granted 57,156 shares of restricted common stock at a weighted average current market price of $22.71. In 2012 and 2011, Bancorp awarded performance-based restricted stock units (RSUs) with fair values of $20.57 and $21.99, respectively to executive officers of the Bank, the three-year performance period for which began January 1 of the award year. Bancorp believes the most likely vesting of all RSUs will be 39,525 shares of common stock. No stock options have been granted since 2007.

Options and SARs outstanding, stated in thousands, at December 31, 2012 were as follows:

Expiration	Number of options and SARs outstanding	Options and SARs exercisable	Weighted average exercise price of options and SARs outstanding

2013	87	87	$	20.17
2014	132	132	22.70
2015	1	1	20.90
2016	157	157	24.07
2017	125	125	26.81
2018	92	79	23.37
2019	89	54	22.15
2020	82	33	21.03
2021	64	13	23.78
2022	98	—	22.87
	927	681	$	23.21