(17)

Stock-Based Compensation

The fair value of all stock-based 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 expiring

2005

plan for future awards under the

2015

plan. No additional shares were made available. As of

December

31,

2016,

there were

407,781

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

and forward, 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, a single

three

-year performance period, and are based upon certain

three

-year performance criterion which begins

January

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. Beginning in

2015,

grants require a

one

year post-vesting holding periods and the fair value of such grants incorporates a liquidity discount of

4.50%

related to the holding period.

Grants of restricted stock units (“RSUs”) to directors are time-based and vest

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 for SARs, PSUs, and RSUs, within salaries and employee benefits for employees, and within other non-interest expense for directors, in the consolidated statements of income as follows:

(in thousands)
	2016			2015			2014
Stock-based compensation expense before income taxes	$	2,473		$	2,134		$	2,016
Less: deferred tax benefit		(866	)		(747	)		(706	)
Reduction of net income	$	1,607		$	1,387		$	1,310

As of

December

31,

2016

Bancorp has

$3.9

million 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

$2.3

million,

$3.3

million and

$2.5

million from the exercise of options during

2016,

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:

Assumptions	2016			2015			2014

Dividend yield		2.94	%		2.97	%		2.94	%
Expected volatility		19.31	%		22.81	%		23.66	%
Risk free interest rate		1.70	%		1.91	%		2.22	%
Expected life of SARs (years)		7.3			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 awards. 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 years ended

December

31,

2015

and

2016

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		786		14.02	-	17.89	$	15.89	$	4,981	$	3.57		3.5
Unvested		291		14.02	-	19.44		16.55		1,650		3.05		7.7
Total outstanding		1,077		14.02	-	19.44		16.07		6,631		3.43		4.6

Activity during 2015
SARs granted		75		34.43	-	36.83		22.99		167		3.97
Exercised		(230	)	21.03	-	26.83		16.27		1,970		3.85
Forfeited		-			0			-		-		-

At December 31, 2015
Vested and exercisable		656		$14.02	-	19.44	$	15.75	$	6,191	$	3.39		3.7
Unvested		266		15.24	-	24.55		18.66		1,733		3.29		7.7
Total outstanding		922		14.02	-	24.55		16.59		7,924		3.36		4.8

Activity during 2016
SARs granted		88		25.76	-	33.08		25.84		1,866		3.56
Exercised		(272	)	14.02	-	17.89		16.38		4,155		3.73
Forfeited		(3	)	14.02	-	15.84		15.18		60		2.94

At December 31, 2016
Vested and exercisable		475		14.02	-	24.56		15.72		14,820		3.16		4.3
Unvested		260		15.24	-	33.08		21.53		6,623		3.43		7.8
Total outstanding		735		14.02	-	33.08		17.78		21,443		3.26		5.5

Vested year-to-date		92		$15.24	-	24.56	$	17.46	$	2,726	$	3.14

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.

The aggregate intrinsic value of stock options and SARs exercised in

2016,

2015

and

2014

was

$4.2

million,

$2.0

million and

$1.1

million, 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

2016,

2015

and

2014

were

$3.56,

$5.95

and

$5.37,

respectively.

Options and SARs outstanding, stated in thousands, at

December

31,

2016

were as follows:

Expiration	Number of options and SARs outstanding		Options and SARs exercisable		Weighted average exercise price of options and SARs outstanding
2017		4		4	$	17.89
2018		43		43		15.58
2019		53		53		14.76
2020		79		79		14.02
2021		84		84		15.85
2022		134		107		15.25
2023		80		52		15.26
2024		94		38		19.37
2025		76		15		22.99
2026		88		-		25.84
		735		475	$	17.78

A summary of Bancorp granted shares of restricted common stock, for the

three

year period ending

December

31,

2016,

follows.

				Grant date
				weighted-
	Number			average cost
Unvested at December 31, 2013		186,834		$	15.18
Shares awarded		59,595			19.41
Restrictions lapsed and shares released to employees/directors		(67,086	)		15.13
Shares forfeited		(8,204	)		15.85
Unvested at December 31, 2014		171,139		$	16.63
Shares awarded		52,898			22.99
Restrictions lapsed and shares released to employees/directors		(61,205	)		15.89
Shares forfeited		(6,974	)		18.97
Unvested at December 31, 2015		155,858		$	18.98
Shares awarded		51,122			25.78
Restrictions lapsed and shares released to employees/directors		(49,265	)		17.98
Shares forfeited		(12,480	)		20.69
Unvested at December 31, 2016		145,235		$	21.57

Bancorp awarded performance-based restricted stock units (“PSUs”) to executive officers of Bancorp, the single

three

-year performance period for which began

January

of the award year. The following table outlines the PSU grants.

			Fair
	Vesting		value at		Expected
Grant	period		grant		shares to
year	in years		date		be awarded
2014		3	$	17.61		50,025
2015		3		20.02		51,910
2016		3		22.61		38,037

In the

first

quarter of

2016,

Bancorp awarded

8,144

RSUs to directors of Bancorp with a grant date fair value of

$200

thousand. In the

second

quarter of

2016,

1,018

RSUs were cancelled in conjunction with the death of a director, leaving

7,126

RSUs outstanding with a grant date fair value of

$175

thousand.

Bancorp has no equity compensation plans which have not been approved by shareholders. 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,

2016.

Plan category

(shares in thousands)

Number of shares to

be issued upon

exercise

Weighted

average

exercise price

available for

future

issuance (a)

Equity compensation plans approved by security holders:

Stock options

17.89

408

Stock appreciation rights (SARs)

(b)

(a)

Restricted common stock

145

N/A

(a)

Performance stock units

(c)

N/A

(a)

Restricted stock units

N/A

(a)

Total shares

156

408

(a)	Under the 2015 Omnibus Equity Compensation 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, 2016, approximately 731,000 SARs were outstanding at a weighted average grant price of $17.78. 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 dependent upon Bancorp achieving certain predefined performance targets and ranges from zero shares to approximately 193,000 shares. As of December 31, 2016, the expected shares to be awarded are 139,972.