(

) 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.

additional shares were made available. As of

December 31, 2017,

there were

302,727

shares available for future awards. The

2005

Stock Incentive Plan expired in

April 2015;

however, SARs granted under this plan expire as late as

2025.

Bancorp

longer has stock options outstanding

December 31, 2017.

Stock appreciation rights (“SARs”) granted have a vesting schedule of

20%

per year and 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 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 market 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 related to the holding period of

5.1%,

4.5%

and

3.6%

for

2017,

2016

and

2015

grants, respectively.

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 market value of underlying shares on the date of grant.

Bancorp has recognized stock-based compensation expense

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

(In thousands)
	2017			2016			2015
Stock-based compensation expense before income taxes	$	2,892		$	2,473		$	2,134
Less: deferred tax benefit		(607	)		(866	)		(747	)

Reduction of net income	$	2,285		$	1,607		$	1,387

Bancorp

’s net income for

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. These benefits resulted in a

$1.5

million increase in net income for

2017.

This tax benefit is

not

reflected in the table above.

As of

December 31,

201

Bancorp has

$4.8

million of unrecognized stock-based compensation expense that will be recorded as compensation expense over the next

five

years as awards vest. In

2017

Bancorp used cash of

$216

thousand for the purchase of shares related to RSUs. Bancorp received cash of

$2.3

million and

$3.3

million from the exercise of options during

2016

and

2015,

respectively.

Fair values of Bancorp

’s 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	2017			2016			2015

Dividend yield		2.72	%		2.94	%		2.97	%
Expected volatility		19.47	%		19.31	%		22.81	%
Risk free interest rate		2.29	%		1.70	%		1.91	%
Expected life of SARs (in years)		7.0			7.3			7.5

Dividend yield and expected volatility are based on historical information for Bancorp corresponding to the expected life of 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. 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 year

s ended

December 31, 2016

and

2017

follows.

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

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

Activity during 2017
SARs granted		46		40.00	-	40.00		40.00		–		6.34
Exercised		(77	)	14.02	-	17.89		15.41		1,855		3.18
Forfeited		–			–			–		–		–

At December 31, 2017
Vested and exercisable		490		14.02	-	33.08		16.46		10,408		3.16		4.0
Unvested		214		15.26	-	40.00		26.46		2,515		4.17		7.7
Total outstanding		704		14.02	-	40.00		19.51		12,923		3.47		5.1


Vested year-to-date		93		$15.24	-	33.08	$	19.37	$	1,696	$	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.

The aggregate intrinsic value of stock options and SARs exercised in

201

2016

and

2015

was

$1.9

million,

$4.2

million and

$2.0

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

201

2016

and

2015

were

$6.34,

$3.56

and

$5.95,

respectively.

SARs outstanding, stated in thousands, at

December

31,

2017

were as follows:

Expiration	Number of SARs outstanding		SARs exercisable		Weighted average exercise price of SARs outstanding
2018		17		17	$	15.58
2019		40		40		14.76
2020		73		73		14.02
2021		74		74		15.86
2022		117		117		15.25
2023		80		66		15.26
2024		94		56		19.37
202 5		76		30		22.99
202 6		88		17		25.84
2027		45		–		40.00
		704		490	$	19.51

A summary of Bancorp granted shares of restricted common stock, f

or the

three

year period ending

December 31, 2017,

follows.

				Grant date
				weighted-
	Number			average cost
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
Shares awarded		28,625			44.85
Restrictions lapsed and shares released to employees/directors		(46,797	)		19.79
Shares forfeited		(7,691	)		25.18
Unvested at December 31, 2017		119,372		$	27.62

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.

			Fair
	Vesting		value at		Expected
Grant	period		grant		shares to
year	in years		date		be awarded
2015		3	$	20.02		43,011
2016		3		22.61		69,161
2017		3		35.66		43,325

In the

first

quarter of

201

Bancorp awarded

4,680

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

$220

thousand.

Bancorp has

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, 2017.

Plan category

(Shares in thousands)

Number of shares to

be issued upon exercise

/vesting

Weighted

averag

exercise price

available for

future

issuance (a)

Equity compensation plans approved by security holders:

Stock appreciation rights (SARs)

(b)

303

Restricted common stock

119

N/A

(a)

Performance stock units

(c)

N/A

(a)

Restricted stock units

N/A

(a)

Total shares

124

303

(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, 2017, approximately 704,000 SARs were outstanding at a weighted average grant price of $19.51. 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 205,000 shares. As of December 31, 2017, the expected shares to be awarded are 155,497.