Note 17 - Stock-based Compensation

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

(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.

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. In 2018 shareholders approved an additional 500,000 shares for issuance under the plan. As of December 31, 2019, there were 547,000 shares available for future awards. The 2005 Stock Incentive Plan expired in April 2015 and SARs granted under this plan expire as late as 2025. The 2015 Stock Incentive Plan has no defined expiration date.

Stock Options – Bancorp had no stock options outstanding as of December 31, 2019 and 2018.

SAR Grants – 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 of SARs are estimated at the date of grant using the Black-Scholes option pricing model, a leading formula for calculating such value. The model requires the input 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:

	2019			2018			2017
Dividend yield		2.54	%		2.56	%		2.72	%
Expected volatility		20.39	%		20.17	%		19.47	%
Risk free interest rate		2.52	%		2.96	%		2.29	%
Expected life of SARs (years)	7.2			7.0			7.0

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 underlying shares for the expected term calculated 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.

RSA Grants – RSAs 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 RSAs is equal to the market value of the shares on the date of grant.

PSU Grants – PSUs vest based upon service and a 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 market value of the underlying shares on the date of grant, adjusted for non-payment of dividends. Grants require a one year post-vesting holding period and the fair value of such grants incorporates a liquidity discount related to the holding period of 4.1%, 4.3% and 5.1% for 2019, 2018, and 2017.

RSU Grants – RSUs are only granted to non-employee 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 equals market value of underlying shares on the date of grant.

In the first quarters of 2019 and 2018, Bancorp awarded 9,834 and 6,525 RSUs to non-employee directors of Bancorp with a grant date fair value of $330,000 and $247,000.

Bancorp utilized cash of $272,000 and $154,000 during 2019 and 2018 for the purchase of shares upon the vesting of RSUs.

Bancorp has recognized stock-based compensation expense for SARs, RSAs, and PSUs within compensation expense, and RSUs for directors within other non-interest expense, as follows:

	Year Ended December 31, 2019
(in thousands)	Stock Appreciation Rights			Restricted Stock Awards			Restricted Stock Units			Performance Stock Units			Total
Expense	$	345		$	1,185		$	329		$	1,719		$	3,578
Deferred tax benefit		(72	)		(249	)		(69	)		(361	)		(751	)
Total net expense	$	273		$	936		$	260		$	1,358		$	2,827

	Year Ended December 31, 2018
(in thousands)	Stock Appreciation Rights			Restricted Stock Awards			Restricted Stock Units			Performance Stock Units			Total
Expense	$	379		$	1,100		$	248		$	2,300		$	4,027
Deferred tax benefit		(80	)		(231	)		(52	)		(483	)		(846	)
Total net expense	$	299		$	869		$	196		$	1,817		$	3,181

	Year Ended December 31, 2017
(in thousands)	Stock Appreciation Rights			Restricted Stock Awards			Restricted Stock Units			Performance Stock Units			Total
Expense	$	280		$	1,032		$	219		$	1,361		$	2,892
Deferred tax benefit		(59	)		(216	)		(46	)		(286	)		(607	)
Total net expense	$	221		$	816		$	173		$	1,075		$	2,285

Beginning in 2017 Bancorp’s adopted ASU 2016-09 which changed the way excess tax benefits and deficiencies related to stock-based compensation were recorded. Prior to 2017, these were recorded directly to APIC and, thus did not affect earnings. Beginning in 2017, these were recorded as a tax expense/benefit on the income statement. These benefits resulted in $812,000, $549,000 and $1.5 million increases in net income for 2019, 2018 and 2017. This tax benefit is not reflected in the above tables.

Detail of unrecognized stock-based compensation expense follows:

(in thousands) Year ended	Stock Appreciation Rights		Restricted Stock Awards		Restricted Stock Units		Performance Stock Units		Total
2020	$	306	$	1,035	$	2	$	853	$	2,196
2021		248		816		—		462		1,526
2022		193		547		—		—		740
2023		118		302		—		—		420
2024		11		24		—		—		35
2025		—		—		—		—		-
Total estimated expense	$	876	$	2,724	$	2	$	1,315	$	4,917

The following table summarizes SARs activity and related information:

													Weighted
							Weighted				Weighted		average
							average		Aggregate		average		remaining
				Exercise			exercise		intrinsic		fair		contractual
(in thousands, except per share and years)	SARs			price			price		value(1)		value		life (in years)
Outstanding, January 1, 2017		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		—			-			-		—		—
Outstanding, December 31, 2017		704		$14.02	-	$40.00	$	19.51	$	12,923	$	3.47		5.1
Outstanding, January 1, 2018		704		$14.02	-	$40.00	$	19.51	$	12,923	$	3.47		5.1
Granted		100		35.90	-	39.32		37.75		—		6.07
Exercised		(73	)	14.02	-	19.37		15.32		1,654		3.43
Forfeited		—			-			-		—		—
Outstanding, December 31, 2018		731		$14.02	-	$40.00	$	22.42	$	8,422	$	3.83		5.2
Outstanding, January 1, 2019		731		$14.02	-	$40.00	$	22.42	$	8,422	$	3.83		5.2
Granted		53		36.65	-	38.18		37.01		213		6.24
Exercised		(143	)	14.02	-	22.96		15.99		3,025		3.47
Forfeited		—			-			-		—		—
Outstanding, December 31, 2019		641		$14.02	-	$40.00	$	25.06	$	10,250	$	4.10		5.3
Vested and exercisable		439		$14.02	-	$40.00	$	20.53	$	9,017	$	3.42		4.0
Unvested		202		22.96	-	40.00		34.93		1,233		5.59		7.9
Outstanding, December 31, 2019		641		$14.02	-	$40.00	$	25.06	$	10,250	$	4.10		5.3
Vested during 2019		91		$19.37	-	$40.00	$	28.80	$	1,110	$	4.66

(1) - Intrinsic value for SARs is defined as the amount by which the current market price of the underlying stock exceeds the exercise or grant price.

SARs outstanding by expiration year follows:

(in thousands, except per share data)
Expiration	SARs Outstanding		SARs Exercisable		Weighted Average Exercise Price
2020		3		3	$	14.02
2021		27		27		15.88
2022		108		108		15.25
2023		80		80		15.26
2024		73		73		19.37
2025		63		49		23.00
2026		88		55		25.84
2027		46		21		40.00
2028		100		23		37.75
2029		53		—		37.01
		641		439	$	25.06

The following table summarizes activity for RSAs granted to officers:

				Grant date
				weighted
(in thousands, except per share data)	RSAs			average cost
Unvested at January 1, 2017		145		$	21.57
Shares awarded		29			44.85
Restrictions lapsed and shares released		(47	)		19.79
Shares forfeited		(8	)		25.18
Unvested at December 31, 2017		119		$	27.62
Unvested at January 1, 2018		119		$	27.62
Shares awarded		40			35.89
Restrictions lapsed and shares released		(44	)		23.62
Shares forfeited		(5	)		31.35
Unvested at December 31, 2018		110		$	32.09
Unvested at January 1, 2019		110		$	32.09
Shares awarded		40			34.88
Restrictions lapsed and shares released		(40	)		28.74
Shares forfeited		(2	)		35.36
Unvested at December 31, 2019		108		$	34.31

Shares expected to be awarded for PSUs granted to executive officers of Bancorp, the three-year performance period for which began January 1 of the award year are as follows:

Grant Year	Vesting Period in Years	Fair Value		Expected Shares to be Awarded
2017	3	$	35.66	61,893
2018	3		31.54	50,352
2019	3		32.03	43,603

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 Bancorp’s equity compensation plan as of December 31, 2019.

	Number of				Shares
	shares to be		Weighted		available for
	issued upon		average		future
Plan category (in thousands)	exercising/vesting		exercise price		issuance (a)
Equity compensation plans approved by security holders:
Stock Appreciation Rights	(b)		(b)			547
Restricted Stock Awards		108		N/A	(a)
Restricted Stock Units		10		N/A	(a)
Performance Stock Units	(c)			N/A	(a)
Total shares		118				547

(a) Under the 2015 Omnibus Equity Compensation Plan, shares of stock are authorized for issuance as incentive and non-qualified stock options, SARs, RSAs, and RSUs.

(b) At December 31, 2019, approximately 641,000 SARs were outstanding at a weighted average grant price of $25.06. 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 196,000 shares. As of December 31, 2019, the expected shares to be awarded are approximately 156,000.