Note 11 - Stock-Based Compensation

9 Months Ended

Sep. 30, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

(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. At Bancorp's 2015 Annual Meeting of Shareholders, shareholders approved the 2015 Omnibus Equity Compensation Plan and authorized the shares available from the 2005 plan for future awards under the 2015 plan. No additional shares were made available. As of September 30, 2015, there were 362,985 shares available for future awards. The 2005 Stock Incentive Plan expired in April 2015; however, options and SARs granted under this plan expire as late as 2025.

Options, which have not been granted since 2007, generally had a vesting schedule of 20% per year. Stock appreciation rights (“SARs”) granted have a vesting schedule of 20% per year. Options and SARs expire ten years after the grant date unless forfeited due to employment termination.

Restricted shares granted to officers 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 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 single 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, fair value of these PSUs is estimated based upon fair value of 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, fair value of the RSUs is estimated based on fair value of 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						For nine months ended
(in thousands)	September 30,						September 30,
	2015			2014			2015			2014
Stock-based compensation expense before income taxes	$	566		$	691		$	1,561		$	1,459
Less: deferred tax benefit		(198	)		(242	)		(546	)		(510	)
Reduction of net income	$	368		$	449		$	1,015		$	949

Bancorp expects to record an additional $514 thousand of stock-based compensation expense in 2015 for equity grants outstanding as of September 30, 2015. As of September 30, 2015, Bancorp has $4.1 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 $2.0 million and $1.4 million from the exercise of options during the first nine months of 2015 and 2014, respectively.

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 assumptions, changes to which can materially affect the fair value estimate. 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 (in years)		7.5			7.0

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 nine months ended September 30, 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		50			34.43	-	36.83		34.48		76		5.95
Exercised		(102	)		21.03	-	26.83		24.22		1,186		5.72
Forfeited		-				-			-		-		-
At September 30, 2015
Vested and exercisable		489			21.03	-	29.16		24.38		5,974		5.17		3.6
Unvested		177			22.86	-	36.83		27.99		1,411		4.93		7.9
Total outstanding		666			21.03	-	36.83		26.19	$	7,385		5.11		4.7
Vested year-to-date		67			21.03	-	29.16		23.77	$	817		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 or grant price.

For the periods ending December 31, 2014 and September 30, 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		34,990			34.43
Restrictions lapsed and shares released to employees/directors		(40,510	)		23.84
Shares forfeited		(3,766	)		28.11
Unvested at September 30, 2015		104,807		$	28.44

Bancorp awarded performance-based restricted stock units (“PSUs”) to executive officers of Bancorp, the single 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		29,181
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. In the second quarter of 2015, 760 RSUs were cancelled, leaving 5,320 RSUs outstanding with a grant date fair value of $175 thousand.