(11)Stock-Based Compensation

The fair value of all awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period.

Bancorp currently has one stock-based compensation plan.

The 2005 Stock Incentive Plan expired in April 2015; however, options and SARs granted under this plan expire as late as 2020. At Bancorp’s Annual Meeting of Shareholders held on April 22, 2015, shareholders approved the 2015 Omnibus Equity Compensation Plan and reserved the shares available from the 2005 plan for future awards under the 2015 plan. No additional shares were made available. As of March 31, 2015, there were 350,852 shares available for future awards.

Options and stock appreciation rights (“SARs”) granted generally have a vesting schedule of 20% per year. Options and SARs expire ten years after the grant date unless forfeited due to employment termination. No stock options have been granted since 2007.

Restricted shares granted to officers generally vest over five years. All restricted shares have been granted at a price equal to the market value of common stock at the time of grant. For all grants prior to 2015, grantees are entitled to dividend payments during the vesting period. For grants in 2015, forfeitable dividends are deferred until the shares are vested. Fair value of restricted shares is equal to the market value of the shares on the date of grant.

Grants of performance stock units (“PSUs”) 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 PSUs is estimated based upon the fair value of the underlying shares on the date of grant, adjusted for non-payment of dividends.

Grants of restricted stock units (“RSUs”) to directors are time-based and vest 12 months after grant date. Because grantees are entitled to deferred dividend payments at the end of the vesting period, the fair value of the RSUs are estimated based on the fair value of the underlying shares on the date of grant.

Bancorp has recognized stock-based compensation expense, within salaries and employee benefits for employees, and within other non-interest expense for directors, in the consolidated statements of income as follows:

	For three months ended
	March 31,
(in thousands)	2015			2014

Stock-based compensation expense before income taxes	$	501		$	290
Less: deferred tax benefit	(176		)	(102		)
Reduction of net income	$	325		$	188

Bancorp expects to record an additional $1.6 million of stock-based compensation expense in 2015 for equity grants outstanding as of March 31, 2015. As of March 31, 2015, Bancorp has $5.1 million of unrecognized stock-based compensation expense that is expected to be recorded as compensation expense over the next five years as awards vest. Bancorp received cash of $296 thousand and $463 thousand from the exercise of options during the first three months of 2015 and 2014, 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 SAR valuations at the grant date in each year:

	2015		2014

Dividend yield	2.97	%	2.94	%
Expected volatility	22.81	%	23.66	%
Risk free interest rate	1.91	%	2.22	%
Expected life of SARs	7.5 years		7.0 years

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

A summary of stock option and SARs activity and related information for the three months ended March 31, 2015 follows:

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

At December 31, 2014
Vested and exercisable	524		$	21.03-26.83	$	23.84	$	4,981	$	5.35	3.5
Unvested	194		21.03-29.16		24.83		1,650		4.57		7.7
Total outstanding	718		21.03-29.16		24.11		6,631		5.14		4.6

Granted	49		34.43		34.43		—		5.95
Exercised	(14	)	21.03-26.83		24.03		130		5.70
Forfeited	—		—		—		—		—

At March 31, 2015
Vested and exercisable	577		21.03-29.05		24.14		6,119		5.26		3.7
Unvested	176		22.86-34.43		27.92		1,151		4.93		8.4
Total outstanding	753		21.03-34.43		26.03		$	7,270	5.18		4.8

Vested year-to-date	66		21.03-29.05		23.74		$	710	4.65

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.

For the periods ending December 31, 2014 and March 31, 2015, Bancorp granted shares of restricted common stock as outlined in the following table:

			Grant date
			weighted-
	Number		average cost
Unvested at December 31, 2013	124,556		$	22.77
Shares awarded	39,730		29.12
Restrictions lapsed and shares released to employees/directors	(44,724	)	22.69
Shares forfeited	(5,469	)	23.77
Unvested at December 31, 2014	114,093		$	24.95
Shares awarded	34,890		34.43
Restrictions lapsed and shares released to employees/directors	(40,360	)	23.83
Shares forfeited	—		—
Unvested at March 31, 2015	108,623		$	28.42

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

	Vesting		Expected
Grant	period	Fair	shares to
year	in years	value	be awarded
2013	3	20.38	36,792
2014	3	26.42	25,012
2015	3	31.54	19,774

In the first quarter of 2015, Bancorp awarded 6,080 RSUs to directors of Bancorp with a grant date fair value of $200 thousand.