(16) 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 an additional 700,000 shares of common stock for issuance under the plan. As of December 31, 2013, there were 513,026 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 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.

Grants of restricted stock units (RSUs) to executive officers vest based upon service and a three-year performance period which begins January 1 of the first year of the performance period. Because grantees are not entitled to dividend payments during the performance period, the fair value of these RSUs is estimated based upon the fair value of the underlying shares on the date of the grant, adjusted for non-payment of dividends.

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

(in thousands)	2013		2012		2011
Stock-based compensation expense before income taxes	$	1,940	$	1,481	$	1,165

Deferred tax benefit	679		518		408

Reduction of net income	$	1,261	$	963	$	757

As of December 31, 2013 Bancorp has $3,132,000 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 $2,435,000, $937,000 and $692,000 from the exercise of options during 2013, 2012 and 2011, respectively.

The fair values 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	2013		2012		2011

Dividend yield	2.80	%	2.52	%	2.48	%
Expected volatility	22.54	%	22.04	%	22.64	%
Risk free interest rate	1.26	%	1.44	%	2.90	%
Forfeitures	6.40	%	4.20	%	6.07	%
Expected life of options (in years)	6.6		7.6		7.5

The expected life of options and SARs is based on actual experience of past like-term stock options. Bancorp evaluates historical exercise and post-vesting termination behavior when determining the expected life. Dividend yield and expected volatility are based on historical information corresponding to the expected life of options and SARs granted. 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.

A summary of stock option and SARs activity and related information for the year ended December 31, 2013 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, 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

Granted	54		22.89		22.89		484		3.61
Exercised	(180	)	20.17-26.83		21.71		1,124		4.81
Forfeited	(4	)	21.03-23.76		22.78		32		4.88

At December 31, 2013
Vested and exercisable	579		20.25-26.83		23.83		4,685		5.43		3.4
Unvested	218		21.03-24.87		22.70		2,011		4.36		7.7
Total outstanding	797		20.25-26.83		23.52		$	6,696	5.14		4.6

Vested during year	79		21.03-24.87		22.56		$	743	4.81

Intrinsic value for stock options and SARs 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 2013, 2012 and 2011 was $1,124,000, $305,000 and $524,000, respectively. The aggregate intrinsic value of stock options and SARs 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 SARs granted in 2013, 2012 and 2011 were $3.61, $3.93 and $5.04, respectively. No stock options have been granted since 2007.

For the three year period ending December 31, 2013, Bancorp granted shares of restricted common stock as outlined in the following table:

			Grant date
			weighted-
	Number		average cost
Unvested at December 31, 2010	81,682		$	21.58
Shares awarded	41,991		23.96
Restrictions lapsed and shares released to employees/directors	(21,333	)	21.82
Shares forfeited	(7,333	)	22.61
Unvested at December 31, 2011	95,007		$	22.49
Shares awarded	57,156		22.71
Restrictions lapsed and shares released to employees/directors	(30,782	)	22.66
Shares forfeited	(7,471	)	22.59
Unvested at December 31, 2012	113,910		$	22.55
Shares awarded	55,275		22.93
Restrictions lapsed and shares released to employees/directors	(39,909	)	22.29
Shares forfeited	(4,720	)	23.45
Unvested at December 31, 2013	124,556		$	22.77

Bancorp awarded performance-based restricted stock units (RSUs) to executive officers of Bancorp, the three-year performance period for which began January 1 of the award year. The following table outlines the RSU grants.

				Expected
	Vesting			shares
Grant	period	Fair		to be
year	in years	value		awarded
2011	3	$	21.99	16,857
2012	3	20.57		22,668
2013	3	20.38		28,579

Options and SARs outstanding, stated in thousands, at December 31, 2013 were as follows:

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

2014	92	92	22.69
2015	1	1	20.90
2016	144	144	24.07
2017	120	120	26.81
2018	73	73	23.37
2019	77	60	22.14
2020	77	45	21.03
2021	62	25	23.78
2022	97	19	22.87
2022	54	—	22.89
	797	579	$	23.52

Bancorp does not have any equity compensation plans which have not been approved by security holders. The following table provides detail of the number of shares to be issued upon exercise of outstanding stock-based awards and remaining shares available for future issuance under all the Bancorp’s equity compensation plans as of December 31, 2013.

Plan category (shares in thousands)	Number of shares to be issued upon exercise	Weighted average exercise price		Shares available for future issuance (a)

Equity compensation plans approved by security holders:
Stock options	356	$	24.63	513
Stock appreciation rights (SARs)	(b)	(b)		(a)
Restricted stock	125	N/A		(a)
Restricted stock units	(c)	N/A		(a)

Total shares	481			513

(a) Under the 2005 Stock Incentive plan, shares of stock are authorized for issuance as incentive and nonqualified stock options, SARs, restricted stock, and restricted stock units

(b) At December 31, 2013, approximately 441,000 SARs were outstanding at a weighted average grant price of $22.63. The number of shares to be issued upon exercise will be determined based on the difference between the grant price and the market price at the date of exercise.

(c) The number of shares to be issued is dependend upon Bancorp achieving certain predefined performance targets and ranges from zero shares to approximately 110,000 shares.