11. Stock-based Compensation

On December 31, 2017, the Company had stock options and stock awards outstanding under its 2006 Incentive Compensation Plan (2006 Plan) and stock options, stock awards and SARs under its 2011 Incentive Compensation Plan (2011 Plan). Stock options, stock awards and SARs are currently granted to Company executives and other key employees. No further options or awards may be granted under the 2006 Plan. The 2011 Plan authorized the award of 2,600,000 shares of the Company’s common stock for stock options, SARs and stock awards. At December 31, 2017, there were 945,161 shares available for grant under the 2011 Plan.

Compensation expense recorded in the consolidated statements of income for all plans was $7,151,000, $12,618,000, and $4,374,000 for the years ended December 31, 2017, 2016 and 2015, respectively. The decrease in stock-based compensation in 2017 versus 2016 was primarily due to the decrease in compensation related to cash-settled SARs. Due to a decrease in the market value of Company common stock from $81.48 at December 31, 2016 to $78.97 at December 31, 2017, the fair value of SARs decreased, resulting in a decrease of the Company’s SARs liability. In 2016, the market value of Company common stock increased $31.79 from 2015 market value, resulting in an increase of the Company’s SARs liability. In addition, performance stock awards compensation expenses decreased year-over-year.

The total income tax benefit recognized in the income statement for share-based compensation arrangements was $2,980,124, $4,761,000, and $1,654,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

Stock Options

Under all plans, stock option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant. The market price is defined and calculated as the average of the opening and closing prices for Company common stock on the grant date as reported in the New York Stock Exchange – Composite Transactions. Stock option awards granted prior to 2017 cliff vest after two years. Stock options granted in 2017 have a three-year graded vesting feature, with one-third of the awards vesting each year. The Company has elected the straight-line method of expense attribution for the stock options with graded vesting feature. These options have 8- to 10-year contractual terms. The fair value of each option award was estimated on the date of grant using the Black-Scholes option valuation model incorporating the weighted-average assumptions noted in the following table. Expected volatility is based on the historical volatility of the Company’s stock. The Company also uses historical data to estimate the expected term of options granted. The risk-free rate is the U.S. Treasury note rate that corresponds to the expected option term at the date of grant. The following are the weighted-average assumptions used to calculate the grant-date fair values of stock option awards granted in the years ended December 31, 2017, 2016 and 2015:

	For the Years Ended December 31
	2017	2016	2015
Expected dividend yield	1.39%	1.45%	1.53%
Expected volatility	30.01%	35.62%	40.32%
Expected term	7.2 years	7.3 years	7.3 years
Risk-free interest rate	2.22%	1.52%	1.96%

A summary of stock option activity for the year ended December 31, 2017 is presented below:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value ($000)
Options
Outstanding at January 1, 2017		436,126		$	42.99
Granted		71,434			78.56
Exercised		(104,277	)		32.32
Forfeited		(11,478	)		50.78
Outstanding at December 31, 2017		391,805			52.09		6.33	$	10,532
Vested or expected to vest at December 31, 2017		384,777			51.95		6.29		10,396
Exercisable at December 31, 2017		230,118			47.62		4.77		7,214

The weighted-average grant-date fair values of options awarded during the years ended December 31, 2017, 2016 and 2015, were $24.49, $14.70, and $15.59, respectively. The total intrinsic values of options exercised during the years ended December 31, 2017, 2016, and 2015 were $5,232,000, $6,620,000, and $1,426,000, respectively.

As of December 31, 2017, the total unrecognized compensation cost for unvested stock options was $1,179,000. That cost is expected to be recognized over a weighted-average period of 2.0 years.

Cash received from stock option exercises under the Company’s stock option plans for the years ended December 31, 2017, 2016, and 2015 was $3,370,000, $4,017,000, and $777,000 , respectively. The actual tax benefit realized for the tax deductions from stock option exercises totaled $1,455,000, $1,899,000, and $351,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

Stock Awards

In 2015, 2016, and 2017, the Company granted stock awards under the 2011 Plan. Most Company stock awards are granted in the form of performance awards. The performance stock awards vest only upon the Company’s achievement of certain Board of Directors approved levels of financial performance by the end of specified measurement periods. The number of Company shares of common stock ultimately distributed, if any, is contingent upon the Company’s actual financial performance attained by the end of the measurement period relative to the Board of Directors approved targets. The fair value of performance stock awards equals the grant-date market price of the Company’s common stock, discounted for the estimated amount of dividends that would not be received during the measurement period. Compensation expense is recorded each reporting period based on the probable number of awards that will ultimately vest given the projected level of financial performance. If at the end of the measurement period the performance objectives are not met, no compensation cost is recognized and any compensation expense recorded in prior periods is reversed. Periodically, the Company also grants stock awards that have no performance conditions associated with their vesting. These stock awards vest based on the service time established for the given grant.

A summary of stock award activity for the year ended December 31, 2017, is presented below:

	Shares			Weighted-Average Grant Date Fair Value
Stock Awards
Unvested at January 1, 2017		256,766		$	40.74
Granted		40,171			75.94
Vested		(113,738	)		39.54
Forfeited		(14,166	)		45.93
Unvested at December 31, 2017		169,033

The weighted-average grant-date fair values of stock awards granted during the years ended December 31, 2017, 2016 and 2015, were $75.94, $41.81, and $39.11 , respectively. As of December 31, 2017, under the current Company assumption as to the number of stock award shares that will vest at the measurement periods ended December 31, 2018 and 2019, there was $3,737,000 of unrecognized compensation cost for unvested stock awards. That cost is expected to be recognized over a period of 1.5 years.

SARs

At December 31, 2017, the Company had both cash-settled and Company stock-settled SARs outstanding. SARs granted prior to 2015 are cash-settled, and SARs granted after 2014 are stock-settled. SARs granted prior to 2017 cliff vest after two years. SARs granted in 2017 have a three-year graded vesting feature, with one-third of the awards vesting each year. The Company has elected the straight-line method of expense attribution for the SARs with graded vesting feature. All SARs expire ten years from the grant date. Upon the exercise of a SARs award, a participant receives in cash (for cash-settled SARs) or Company common stock (for stock-settled SARs) an amount that equals the excess of the fair market value of a share of Company common stock at the date of exercise over the fair market value of a share of Company common stock at the date of grant (the exercise price). Cash-settled SARs are accounted for as liabilities that must be re-measured at fair value at the end of every reporting period until settlement. Compensation expense for each reporting period is based on the period-to-period change (or portion of the change, depending on the proportion of the vesting period that has been completed at the reporting date) in the fair value of the SARs. Compensation expense for stock-settled SARs is based on the grant-date value of the awards allocated over the proportion of the vesting period that has been completed at the reporting date. Because stock-settled SARs are considered equity instruments, they are not re-measured at fair value at the end of each reporting period.

The following is a summary of SARs activity for the year ended December 31, 2017:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value ($000)
SARs
Outstanding at January 1, 2017		553,582		$	47.81
Granted		148,723			78.73
Exercised		(73,739	)		44.67
Forfeited		(11,916	)		68.95
Outstanding at December 31, 2017		616,650			55.23		7.46	$	14,640

The weighted-average grant-date fair values of SARs granted during the years 2017, 2016 and 2015 were $24.90, $14.69, and $15.60 , respectively. The fair value for each SARs award was estimated using the Black-Scholes valuation model incorporating the same assumptions as noted for stock options.

As of December 31, 2017 and 2016, the liability for cash-settled SARs recorded on the consolidated balance sheet (non-current liabilities) was $4,760,000 and $5,832,000, respectively. At December 31, 2017, there was $2,398,000 of total unrecognized compensation cost related to all unvested SARs. That cost is to be recognized over a weighted-average period of 2.0 years.

In general, it is the Company’s policy to issue new shares of its common stock upon the exercise of stock options and stock-settled SARs or the vesting of stock awards.