NOTE 13 – SHARE-BASED COMPENSATION

The Company has various types of share-based compensation plans. These plans are administered by the Compensation Committee of the Board of Directors, which selects persons eligible to receive awards and determines the number of shares and/or options subject to each award, the terms, conditions and other provisions of the awards. During the three months ended March 31, 2013 and 2012, the Company did not have any equity awards that were settled in cash.

Stock option plans

The Company issues stock options under various plans to directors, officers and other key employees. The option exercise price cannot be less than the fair value of the underlying common stock as of the date of the option grant and the maximum option term cannot exceed ten years. The stock options granted were issued with vesting periods ranging from one-and-a half to seven years. At March 31, 2013, future option or restricted stock awards of 485,197 shares could be made under approved incentive compensation plans.

The following table represents the compensation expense that is included in salaries and employee benefits expense and related income tax benefits in the accompanying consolidated statements of comprehensive income related to stock options for the three months ended March 31, 2013 and 2012.


(Dollars in thousands, except per share data)	2013		2012
Compensation expense related to stock options	$	533	$	442
Income tax benefit related to stock options		187		155
Impact on basic earnings per share		0.01		0.01
Impact on diluted earnings per share		0.01		0.01

The Company reported $330,000 and $268,000 of excess tax benefits as financing cash inflows during the three months ended March 31, 2013 and 2012, respectively, related to the exercise and vesting of stock option exercises. Net cash proceeds from the exercise of stock options were $3,181,000 and $1,111,000 for the three months ended March 31, 2013 and 2012, respectively.

The Company uses the Black-Scholes option pricing model to estimate the fair value of share-based awards. The following weighted-average assumptions were used for option awards granted during the three-month periods ended March 31:


	2013			2012
Expected dividends		2.6	%		2.6	%
Expected volatility		34.8	%		41.0	%
Risk-free interest rate		1.7	%		0.9	%
Expected term (in years)		8.6			5.0
Weighted-average grant-date fair value	$	15.37		$	14.74

The assumptions above are based on multiple factors, including historical stock option exercise patterns and post-vesting employment termination behaviors, expected future exercise patterns and the expected volatility of the Company’s stock price.

At March 31, 2013, there was $5,720,000 of unrecognized compensation cost related to stock options which is expected to be recognized over a weighted-average period of 5.1 years.

The following table represents the activity related to stock options during the three months ended March 31, 2013 and 2012.


	Number of shares			Weighted average exercise price		Weighted average remaining contract life
Outstanding options, December 31, 2011		1,097,620		$	50.14
Granted		217,230			51.78
Exercised		(34,278	)		28.98
Forfeited or expired		(3,258	)		51.19

Outstanding options, March 31, 2012		1,277,314		$	50.98		5.2 years
Exercisable options, March 31, 2012		796,208			42.59		3.2 years

Outstanding options, December 31, 2012		1,236,075		$	51.48
Granted		75,722			52.36
Exercised		(91,348	)		34.81
Forfeited or expired		(14,270	)		57.19

Outstanding options, March 31, 2013		1,206,179		$	52.73		5.1 Years

Outstanding exercisable at March 31, 2013		777,945		$	52.21		3.4 Years

At March 31, 2013, the aggregate intrinsic value of shares underlying outstanding stock options and underlying exercisable stock options was $1,671,000 and $1,618,000. Total intrinsic value of options exercised was $1,350,000 and $804,000 for the three months ended March 31, 2013 and 2012, respectively.

Restricted stock plans

The Company issues restricted stock under various plans for certain officers and directors. A supplemental stock benefit plan adopted in 1999 and the 2001, 2005, 2008, and 2010 Incentive Plans allow grants of restricted stock. The plans allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. The holders of the restricted stock receive dividends and have the right to vote the shares. The fair value of the restricted stock shares awarded under these plans is recorded as unearned share-based compensation, a contra-equity account. The unearned compensation related to these awards is amortized to compensation expense over the vesting period (generally three to seven years). The total share-based compensation expense for these awards is determined based on the market price of the Company’s common stock at the date of grant applied to the total number of shares granted and is amortized over the vesting period. As of March 31, 2013, unearned share-based compensation associated with these awards totaled $27,628,000.

The following table represents the compensation expense that was included in salaries and employee benefits expense in the accompanying consolidated statements of income related to restricted stock grants for the three months ended March 31:


(Dollars in thousands)	2013		2012
Compensation expense related to restricted stock	$	1,877	$	1,710

The following table represents unvested restricted stock award activity for the three months ended March 31, 2013 and 2012:


	2013			2012
Balance, beginning of year		538,202			512,112
Granted		148,518			134,988
Forfeited		(11,673	)		(3,055	)
Earned and issued		(89,366	)		(74,928	)

Balance, end of year		585,681			569,117

Phantom stock awards

As part of the 2008 Incentive Compensation Plan and 2009 Phantom Stock Plan, the Company issues phantom stock awards to certain key officers and employees. The award is subject to a vesting period of five to seven years and is paid out in cash upon vesting. The amount paid per vesting period is calculated as the number of vested “share equivalents” multiplied by the closing market price of a share of the Company’s common stock on the vesting date. Share equivalents are calculated on the date of grant as the total award’s dollar value divided by the closing market price of a share of the Company’s common stock on the grant date. Award recipients are also entitled to a “dividend equivalent” on each unvested share equivalent held by the award recipient. A dividend equivalent is a dollar amount equal to the cash dividends that the participant would have been entitled to receive if the participant’s share equivalents were issued in shares of common stock. Dividend equivalents will be deemed to be reinvested as share equivalents that will vest and be paid out on the same date as the underlying share equivalents on which the dividend equivalents were paid. The number of share equivalents acquired with a dividend equivalent is determined by dividing the aggregate of dividend equivalents paid on the unvested share equivalents by the closing price of a share of the Company’s common stock on the dividend payment date.

The following table represents phantom stock award activity during the periods indicated. During the three months ended March 31, 2013 and 2012, the Company recorded $699,000 and $751,000, respectively, in compensation expense based on the number of share equivalents vested at the end of the period and the current market price of the Company’s stock.


	Number of share equivalents			Dividend equivalents			Total share equivalents			Value of share equivalents⁽¹⁾
Balance, December 31, 2011		232,921			8,942			241,863		$	11,924,000
Granted		97,927			2,109			100,036			5,349,000
Forfeited share equivalents		(2,191	)		(95	)		(2,286	)		(122,000	)
Vested share equivalents		(5,483	)		(350	)		(5,833	)		(309,000	)

Balance, March 31, 2012		323,174			10,606			333,780		$	17,847,000

Balance, December 31, 2012		318,729			16,035			334,764		$	16,444,000
Granted		158,213			3,092			161,305			8,068,000
Forfeited share equivalents		(5,176	)		(243	)		(5,419	)		(271,000	)
Vested share equivalents		(30,697	)		(2,120	)		(32,817	)		(1,655,000	)

Balance, March 31, 2013		441,069			16,764			457,833		$	22,901,000

(1)

Except for vested share payments, which are based on the cash paid at the time of vesting, the value of share equivalents is calculated based on the market price of the Company’s stock at the end of the respective periods. The market price of the Company’s stock was $50.02 and $53.47 on March 31, 2013 and 2012, respectively.