(14)

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 expiring

2005

plan for future awards under the

2015

plan. The

2005

Stock Incentive Plan expired in

April

2015.

No additional shares were made available. Options granted under the

2005

plan expired as of

March

31,

2017.

SARs granted under the

2005

plan expire as late as

2025.

As of

March

31,

2017,

there were

273,302

shares available for future awards.

Options, which have not been granted since

2007,

generally had a vesting schedule of

20%

per year and as of

March

31,

2017,

all have been exercised. 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,

2016,

and

2017,

forfeitable dividends are deferred until shares are vested.

Grants of performance stock units (“PSUs”) vest based upon service and a single

three

-year performance period 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. For

2015,

2016

and

2017,

the fair value of such grants incorporates a liquidity discount of

4.80%,

4.50%

and

5.12%,

respectively, 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, 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)	2017			2016
Stock-based compensation expense before income taxes	$	660		$	513

Less: deferred tax benefit		(231	)		(180	)
Reduction of net income	$	429		$	333

Bancorp’s net income for the

three

months ended

March

31,

2017

reflected the implementation of ASU

2016

which changed the way excess tax benefits and deficiencies related to share-based compensation are recorded. Prior to

2017

these were recorded directly to additional paid-in capital and, thus did not affect earnings. Beginning in

2017

these are recorded as a tax expense or benefit in the income statement, and for the

three

months ended

March

31,

2017

resulted in a

$1.0

million increase in net income. This tax benefit is not reflected in the table above.

Bancorp expects to record an additional

$2.1

million of stock-based compensation expense in

2017

for equity grants outstanding as of

March

31,

2017.

As of

March

31,

2017,

Bancorp has

$6.4

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 used cash of

$216

thousand during the

first

three

months of

2017

for the purchase of shares upon the vesting of restricted stock units, net of cash received for options exercised. This compares to cash received of

$495

thousand during the

first

three

months of

2016

for similar activity.

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:

	2017			2016

Dividend yield		2.72	%		2.94	%
Expected volatility		19.47	%		19.31	%
Risk free interest rate		2.29	%		1.70	%
Expected life of SARs (years)		7.0			7.3

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. 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

twelve

month period ended

December

31,

2016

and the

three

month period ended

March

31,

2017

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, 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


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


Granted		46			40.00	-	40.00		40.00		30		6.34
Exercised		(15	)		14.02	-	17.89		15.60		474		3.56
Forfeited		-				-			-		-		-

At March 31, 2017
Vested and exercisable		550			14.02	-	25.76		16.33		13,384		3.15		4.5
Unvested		216			15.24	-	40.00		26.43		3,068		4.17		8.4
Total outstanding		766			14.02	-	40.00		19.17	$	16,452		3.44		5.6

Vested year-to-date		91			$15.24	-	25.76	$	19.34	$	1,942	$	3.18

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.

A summary of activity for the periods ending

December

31,

2016

and

March

31,

2017

for restricted shares of common stock granted to officers is outlined in the following table:

				Grant date
				weighted-
	Number			average cost
Unvested at December 31, 2015		155,858		$	18.98
Shares awarded		51,122			25.78
Restrictions lapsed and shares released		(49,265	)		17.98
Shares forfeited		(12,480	)		20.69
Unvested at December 31, 2016		145,235		$	21.57

Shares awarded		28,625			44.85
Restrictions lapsed and shares released		(46,052	)		19.73
Shares forfeited		(3,009	)		21.85
Unvested at March 31, 2017		124,799		$	27.58

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.

	Vesting				Expected
Grant	period		Fair		shares to
year	in years		value		be awarded
2015		3	$	20.02		51,910
2016		3		22.61		58,786
2017		3		35.66		24,756

In the

first

quarter of

2017,

Bancorp awarded

4,680

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

$220

thousand.