(

) 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. 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 approve an additional

500

thousand shares for issuance under the plan. As of

December 31, 2018,

there were

647

thousand shares available for future awards. The

2005

Stock Incentive Plan expired in

April 2015.

SARs granted under this plan expire as late as

2025.

Bancorp had

stock options outstanding at

December 31, 2018.

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 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 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 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

4.3%,

5.1%

and

4.5%

for

2018,

2017

and

2016

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 equals 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)	For years ended December 31,
	201 8			201 7			201 6
Stock-based compensation expense before income taxes	$	4,027		$	2,892		$	2,473
Less: deferred tax benefit		(846	)		(607	)		(866	)
Reduction of net income	$	3,181		$	2,285		$	1,607

Beginning in

2017

Bancorp’s net income reflects the implementation of ASU

2016

which changed the way excess tax benefits and deficiencies related to stock-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

$549

thousand and

$1.5

million increases in net income for

2018

and

2017,

respectively. This tax benefit is

not

reflected in the table above.

As of

December 31, 2018

Bancorp has

$5.2

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

five

years as awards vest. In

2018

Bancorp used cash of

$154

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

$216

thousand in

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 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:

Assumptions	201 8			201 7			201 6

Dividend yield		2.56	%		2.72	%		2.94	%
Expected volatility		20.17	%		19.47	%		19.31	%
Risk free interest rate		2.96	%		2.29	%		1.70	%
Expected life of SARs (in years)		7.0			7.0			7.3

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. 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 years ended

December 31, 2017

and

2018

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, 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

Activity during 2018
SARs granted		100		35.90	-	39.32		37.75		–		6.07
Exercised		(73	)	14.02	-	19.37		15.32		1,654		3.43
Forfeited		–			–			–		–		–

At December 31, 2018
Vested and exercisable		492		14.02	-	40.00		17.69		7,505		3.21		3.8
Unvested		239		19.37	-	40.00		32.15		917		5.09		8.0
Total outstanding		731		14.02	-	40.00		22.42		8,422		3.82		5.2


Vested year-to-date		75		$15.26	-	40.00	$	23.38	$	776	$	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 or grant price.

The aggregate intrinsic value of stock options and SARs exercised in

2018,

2017

and

2016

was

$1.7

million,

$1.9

million and

$4.2

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

2018,

2017

and

2016

were

$6.07,

$6.34

and

$3.56,

respectively.

SARs outstanding, stated in thousands, at

December

31,

2018

were as follows:

Expiration	Number of SARs outstanding		SARs exercisable		Weighted average exercise price of SARs outstanding
2019		24		24	$	14.76
2020		44		44		14.02
2021		74		74		15.86
2022		117		117		15.25
2023		80		80		15.26
2024		83		64		19.37
2025		76		45		22.99
2026		88		35		25.84
2027		45		9		40.00
2028		100		–		37.75
		731		492	$	22.42

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

three

year period ending

December 31, 2018,

follows.

				Grant date
				weighted-
	Number			average value
Unvested at December 31, 2015		156		$	18.98
Shares awarded		51			25.78
Restrictions lapsed and shares released to employees/directors		(49	)		17.98
Shares forfeited		(13	)		20.69
Unvested at December 31, 2016		145		$	21.57
Shares awarded		29			44.85
Restrictions lapsed and shares released to employees/directors		(47	)		19.79
Shares forfeited		(8	)		25.18
Unvested at December 31, 2017		119		$	27.62
Shares awarded		40			35.89
Restrictions lapsed and shares released to employees/directors		(44	)		23.62
Shares forfeited		(5	)		31.35
Unvested at December 31, 2018		110		$	32.09

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

three

-year performance period for which began

January 1

of the award year, as follows:

		Fair
	Vesting	value at		Expected
Grant	period	grant		shares to
year	in years	date		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.

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 Bancorp’s equity compensation plan as of

December 31, 2018.

Plan category

(Shares in thousands)

Number of shares to be issued upon exercise

/vesting

Weighted average exercise price

Shares available for future issuance (a)

Equity compensation plans approved by security holders:

Stock appreciation rights (SARs)

(b)

647

Restricted common stock

110

N/A

(a)

Performance stock units

(c)

N/A

(a)

Restricted stock units

N/A

(a)

Total shares

117

647

(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, 2018, approximately 731 thousand SARs were outstanding at a weighted average grant price of $22.42. 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 203 thousand shares. As of December 31, 2018, the expected shares to be awarded are approximately 181 thousand.