Note

Stock-

Based Compensation

The Company maintains the 2016 Stock Plan (“2016 Plan”), the 2006 Stock Plan (“2006 Plan”) and the 2011 Employee Stock Purchase Plan (“2011 ESPP”).

In connection with the acquisition of

Fidelity, the Company assumed the Fidelity 2004 Long Term Incentive Plan and the 2005 Long Term Incentive Plan (the “Fidelity Plans”).

In connection with the acquisition of Virginia Heritage, the Company assumed the Virginia Heritage 2006 Stock Option Plan and the 2010 Long Term Incentive Plan (the “Virginia Heritage Plans”).

No additional options may be granted under the 2006 Plan, the Fidelity Plans or the Virginia Heritage Plans.

The Company adopted the 2016 Plan upon approval by the shareholders at the 2016 Annual Meeting held on May 12, 2016. The 2016 Plan provides directors and selected employees of the Bank, the Company and their affiliates with the opportunity to acquire shares of stock, through awards of options, time vested restricted stock, performance-based restricted stock and stock appreciation rights. Under the 2016 Plan, 1,000,000 shares of common stock were initially reserved for issuance of which 998,500 remain available for future awards at September 30, 2016.

For awards that are service based, compensation expense is being recognized over the service (vesting) period based on fair value, which for stock option grants is computed using the Black-Scholes model, and for restricted stock awards is based on the average of the high and low stock price of the Company’s shares on the date of grant. For awards that are performance-based, compensation expense is recorded based on the probability of achievement of the goals underlying the grant.

In February 2016, the Company awarded 80,365 shares of time vested restricted stock to senior officers, and certain employees. The shares vest in three substantially equal installments beginning on the first anniversary of the date of grant.

In February 2016, the Company awarded senior officers a targeted number of 34,957 performance vested restricted stock units (PRSU’s). PRSU’s are subject to the satisfaction of certain performance conditions based on the achievement of pre-established average targets for earnings per share growth, total shareholder return and return on average assets over or at the end of a three-year vesting period (2016-2018).

In March 2016, the Company awarded 24,410 shares of time vested restricted stock to directors. The shares vest in three substantially equal installments beginning on the first anniversary of the date of grant.

In May 2016, the Company awarded incentive stock options to purchase 1,500 shares which have a ten-year term and vest in four equal installments beginning on the first anniversary of the date of grant.

In September 2016, the Company awarded incentive stock options to purchase 1,500 shares which have a ten-year term and vest in four equal installments beginning on the first anniversary of the date of grant.

Below is a summary of changes in stock option shares pursuant to our equity compensation plans for the nine months ended September 30, 2016 and 2015. The information excludes restricted stock units and awards.

	Nine Months Ended September 30,
	2016					2015
	Shares			Weighted-Average Exercise Price		Shares			Weighted-Average Exercise Price

Beginning balance		298,740		$	9.97		759,683		$	11.36
Issued		3,000			49.49		-			-
Exercised		(24,458	)		13.10		(377,357	)		12.73
Forfeited		(1,100	)		15.48		(12,380	)		29.58
Expired		(6,637	)		12.87		(8,476	)		17.32
Ending balance		269,545		$	10.03		361,470		$	9.16

The following summarizes information about stock options outstanding at September 30, 2016. The information excludes restricted stock units and awards.

								Weighted-Average
Outstanding:				Stock Options		Weighted-Average		Remaining
Range of Exercise Prices				Outstanding		Exercise Price		Contractual Life
$	5.76	$	10.72		156,345	$	5.76		2.27
$	10.73	$	15.45		59,232		10.90		1.46
$	15.46	$	20.01		36,747		15.48		0.13
$	20.02	$	49.91		17,221		34.21		7.46
					269,545	$	10.03		2.13

Exercisable:				Stock Options		Weighted-Average
Range of Exercise Prices				Exercisable		Exercise Price
$	5.76	$	10.72		104,298	$	5.76
$	10.73	$	15.45		59,232		10.90
$	15.46	$	20.01		36,747		15.48
$	20.02	$	49.91		6,901		22.74
					207,178	$	9.52

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions as shown in the table below used for grants during the years ended December 31, 2015 and 2014.

	Nine Months Ended			Years Ended December 31,
	September 30, 2016			2015			2014
Expected volatility		24.23	%		31.21	%		34.25	%
Weighted-Average volatility		24.23	%		31.21	%		34.25	%
Expected dividends		0.0	%		0.0	%		0.0	%
Expected term (in years)		7.0			7.0			9.4
Risk-free rate		1.37	%		1.64	%		2.26	%
Weighted-average fair value (grant date)	$	14.27		$	16.73		$	13.49
Weighted-average fair value (grant date) for Virginia Heritage Bank ("VHB") options assumed		n/a			n/a		$	24.89

The expected lives are based on the “simplified” method allowed by ASC Topic 718

“Compensation

,”

whereby the expected term is equal to the midpoint between the vesting period and the contractual term of the award.

The total intrinsic value of outstanding stock options was $10.5 million at September 30, 2016. The total intrinsic value of stock options exercised during the nine months ended September 30, 2016 and 2015 was $855 thousand and $8.5 million, respectively. The total fair value of stock options vested was $45 thousand and $87 thousand for the nine months ended September 30, 2016 and 2015, respectively. Unrecognized stock-based compensation expense related to stock options totaled $141 thousand at September 30, 2016. At such date, the weighted-average period over which this unrecognized stock option expense is expected to be recognized was 2.97 years.

The Company has unvested restricted stock awards and PRSU grants of 303,612 shares under the 2006 Plan at September 30, 2016. Unrecognized stock based compensation expense related to restricted stock awards totaled $6.5 million at September 30, 2016. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 1.83 years. The following table summarizes the unvested restricted stock awards at September 30, 2016 and 2015.

	Nine Months Ended September 30,
	2016					2015
	Shares			Weighted- Average Grant Date Fair Value		Shares			Weighted- Average Grant Date Fair Value

Unvested at beginning		369,093		$	24.43		509,336		$	21.58
Issued		139,732			45.45		78,070			36.06
Forfeited		(9,475	)		40.58		(4,150	)		29.18
Vested		(195,738	)		22.53		(195,503	)		20.74
Unvested at end		303,612		$	34.83		387,753		$	24.89

Approved by shareholders in May 2011, the 2011 ESPP reserved 550,000 shares of common stock (as adjusted for stock dividends) for issuance to employees. Whole shares are sold to participants in the plan at 85% of the lower of the stock price at the beginning or end of each quarterly offering period. The 2011 ESPP is available to all eligible employees who have completed at least one year of continuous employment, work at least 20 hours per week and at least five months a year. Participants may contribute a minimum of $10 per pay period to a maximum of $6,250 per offering period or $25,000 annually (not to exceed more than 10% of compensation per pay period). At September 30, 2016, the 2011 ESPP had 420,765 shares remaining for issuance.

Included in salaries and employee benefits the Company recognized $5.2 million and $3.7 million in stock-based compensation expense for the nine months ended September 30, 2016 and 2015, respectively. Stock-based compensation expense is recognized ratably over the requisite service period for all awards.