(

)

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;

however,

500

thousand additional shares were made available in the

second

quarter of

2018.

SARs granted under this plan expire as late as

2025.

As of

September 30, 2018,

there were

696,711

shares available for future awards.

Options, which have

not

been granted since

2007,

generally had a vesting schedule of

20%.

The last remaining options were exercised in the

first

quarter of

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. Fair values are determined using the Black Scholes pricing model as described later in this foot note.

Restricted shares granted to officers vest over

five

years. 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 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, 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 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

4.26%,

5.12%

and

4.50%

for

2018,

2017,

and

2016,

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 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
	September 30,						September 30,
(In thousands)	2018			2017			2018			2017
Stock-based compensation expense before income taxes	$	887		$	670		$	2,923		$	2,012
Less: deferred tax benefit		(186	)		(235	)		(614	)		(704	)
Reduction of net income	$	701		$	435		$	2,309		$	1,308

Bancorp expects to record an additional

$877

thousand of stock-based compensation expense in

2018

for equity grants outstanding as of

September 30, 2018.

As of

September 30, 2018,

Bancorp has

$5.9

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

$154

thousand during the

first

nine

months of

2018

for the purchase of shares upon the vesting of restricted stock units. This compares with cash used of

$216

thousand during the

first

nine

months of

2017

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

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 use of assumptions, changes to which can materially affect the fair value estimate. The following assumptions were used in SAR valuations at the grant date in each year:

	2018			2017

Dividend yield		2.57	%		2.72	%
Expected volatility		20.60	%		19.47	%
Risk free interest rate		2.82	%		2.29	%
Expected life of SARs (in years)		7.0			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. 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, 2017

and the

nine

month period ended

September 30, 2018

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, 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		-		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


Granted		47			35.90	-	38.85		36.01		18		6.67
Exercised		(65	)		14.02	-	19.37		15.39		1,525		3.41
Forfeited		-					-		-		-		-

At September 30, 2018
Vested and exercisable		500			14.02	-	40.00		17.64		9,363		3.22		4.0
Unvested		187			19.37	-	40.00		30.14		1,293		4.97		7.8
Total outstanding		687			14.02	-	40.00		21.04		10,656		3.70		5.0

Vested year-to-date		75		$	15.26	-	40.00	$	23.35	$	1,006	$	3.77

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

grant price.

A summary of activity for the

twelve

month period ending

December 31, 2017

and the

nine

month period ending

September 30, 2018

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

				Grant date
				weighted-
	Number			average cost
Unvested at December 31, 2016		145,235		$	21.57
Shares awarded		28,625			44.85
Restrictions lapsed and shares released		(46,797	)		19.79
Shares forfeited		(7,691	)		25.18
Unvested at December 31, 2017		119,372			27.62

Shares awarded		38,680			36.03
Restrictions lapsed and shares released		(44,372	)		23.58
Shares forfeited		(4,637	)		30.93
Unvested at September 30, 2018		109,043		$	32.10

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
2016		3	$	22.61		69,161
2017		3		35.66		61,893
2018		3		31.54		50,352

In the

first

quarter of

2018,

Bancorp awarded

6,525

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

$247

thousand.