Stock Plans and Stock Based Compensation

Under the Tompkins Financial Corporation 2009 Equity Plan (“2009 Equity Plan”), the Company may grant incentive stock options, stock appreciation rights ("SARs"), shares of restricted stock and restricted stock units covering up to 1,602,000, shares of the Company's common stock to certain officers, employees, and nonemployee directors. Stock options and SARs are granted at an exercise price equal to the stock’s fair value at the date of grant, may not have a term in excess of ten years, and have vesting periods that range between one and seven years from the grant date. Restricted stock awards have vesting periods that range between one and seven years from grant date, and have grant date fair values that equal the closing price of the Company’s common stock on grant date. Prior to the adoption of the 2009 Equity Plan, the Company had similar stock option plans, which remain in effect solely with respect to unexercised options issued under these plans.

The Company granted 73,716 equity awards to its employees in 2016, consisting of 53,770 shares of restricted stock and 19,946 SARs. The Company granted 109,750 equity awards to its employees in 2015, consisting of 61,235 shares of restricted stock, and 48,515 SARs. The Company granted 186,982 equity awards to its employees in 2014, consisting of 101,100 shares of restricted stock, 81,495 SARs, and 4,387 shares of stock.

The following table presents the activity related to stock options and SARs under all plans for the year ended December 31, 2016.



	Number of Shares/Rights		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2016	441,016		$	42.46
Granted	19,946		77.00
Exercised	(107,528	)	38.77
Forfeited	(14,918	)	45.00
Outstanding at December 31, 2016	338,516		$	45.56	5.56	$	16,582,002
Exercisable at December 31, 2016	155,046		$	39.43	3.17	$	8,544,305

Total stock-based compensation expense for stock options and SARs was $476,000 in 2016, $509,000 in 2015, and $734,000 in 2014. As of December 31, 2016, unrecognized compensation cost related to unvested stock options and SARs totaled $1.3 million. The cost is expected to be recognized over a weighted average period of 4.4 years. Net cash proceeds, tax benefits and intrinsic value related to total stock options, SARs, and restricted stock exercised is as follows:



(in thousands)	2016			2015		2014
Net proceeds from stock option exercises	$	(806	)	$	1,382	$	1,512
Tax benefits related to stock option and SAR exercises and vesting of restricted shares	1,433			358		234
Intrinsic value of stock option exercises	3,718			3,014		2,112

The Company uses the Black-Scholes option-valuation model to determine the fair value of incentive stock options and SARs at the date of grant. The valuation model estimates fair value based on the assumptions listed in the table below. The risk-free rate is the interest rate available on zero-coupon U.S. Treasury instruments with a remaining term equal to the expected term of the share option at the time of grant. The expected dividend yield is based on the dividend trends and the market price of the Company’s stock price at grant. Volatility is largely based on historical volatility of the Company’s stock price. The expected term is based upon historical experience of employee exercises and terminations as the vesting term of the grants. The fair values of the grants are expensed over the vesting periods.



	2016			2015			2014
Weighted per share average fair value at grant date	$	12.88		$	8.96		$	8.32
Risk-free interest rate	1.57		%	1.80		%	1.91		%
Expected dividend yield	3.00		%	3.80		%	5.14		%
Volatility	24.58		%	25.32		%	30.96		%
Expected life (years)	5.50			6.00			6.00



December 31, 2016
Options and SARs Outstanding			Options and SARs Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$13.00-20.00	626	2.96	$	16.47	626	$	16.47
$20.01-29.30	2,985	4.23	$	22.03	2,985	$	22.03
$29.31-35.70	1,295	1.96	$	30.96	1,295	$	30.96
$35.71-37.50	99,466	3.07	$	37.12	71,706	$	37.16
$37.51-41.00	41,003	6.34	$	40.60	9,755	$	40.60
$41.01-50.00	126,295	5.47	$	45.71	68,679	$	42.76
$50.01-60.00	46,900	8.84	$	56.29	0	$	0
$60.01-86.18	19,946	9.86	$	77.00	0	$	0
	338,516	5.56	$	45.56	155,046	$	39.43

The following table presents activity related to restricted stock awards for the twelve months ended December 31, 2016.



	Number of Shares		Weighted Average Exercise Price
Unvested at January 1, 2016	247,347		$	47.57
Granted	53,770		76.93
Vested	(36,030	)	73.99
Forfeited	(13,371	)	46.88
Unvested at December 31, 2016	251,716		$	54.46

The Company granted 53,770 restricted stock awards in 2016 at an average grant date fair value of $76.93. The Company granted 61,235 restricted stock awards in 2015 at an average grant date fair value of $56.29. The Company granted 101,100 restricted stock awards in 2014 at an average grant date fair value of $49.22. The grant date fair values were the closing prices of the Company’s common stock on the grant dates. The Company recognized stock-based compensation related to restricted stock awards of $1.8 million in 2016, $1.4 million in 2015, and $771,000 in 2014. Unrecognized compensation costs related to restricted stock awards totaled $11.0 million at December 31, 2016 and will be recognized over 4.8 years on a weighted average basis.