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

December

31,

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 under the

2006

plan 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.

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.

February

2016,

the Company awarded senior officers a targeted number of

34,957

performance vested restricted stock units (PRSU’s). Absent acceleration for defined events such as death, disability and retirement, the vesting of PRSU’s is

100%

after

three

years with payouts based on threshold, target or maximum average performance targets over the

three

year period relative to a peer index. The

three

performance metrics are average annual earnings per share growth, average annual total shareholder return and average annual return on average assets.

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.

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.

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 stock option activity for the

twelve

months ended

December

31,

2016,

2015

and

2014.

The information excludes restricted stock awards.

	Years Ended December 31,
	2016					2015					2014
	Shares			Weighted- Average Exercise Price		Shares			Weighted- Average Exercise Price		Shares			Weighted- Average Exercise Price

Beginning balance		298,740		$	9.97		759,683		$	11.36		503,834		$	10.41
Issued		3,000			49.49		5,000			46.50		21,000			32.77
Assumed from
Virginia Heritage		-			-		-			-		401,497			13.16
Exercised		(77,144	)		14.48		(443,912	)		12.03		(157,313	)		14.71
Forfeited		(1,100	)		15.48		(12,380	)		29.58		(8,110	)		33.06
Expired		(6,637	)		12.87		(9,651	)		18.19		(1,225	)		9.00
Ending balance		216,859		$	8.80		298,740		$	9.97		759,683		$	11.36

The following summarizes information about stock options outstanding at

December

31,

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		154,535		$ 5.76		2.02
$	10.73	$	15.45		47,886		10.83		1.49
$	15.46	$	20.01		447		16.66		6.22
$	20.02	$	49.91		13,991		35.12		7.23
					216,859		$ 8.80		2.25

Exercisable:				Stock Options		Weighted-Average
Range of Exercise Prices				Exercisable		Exercise Price
$	5.76	$	10.72		102,488		$ 5.76
$	10.73	$	15.45		47,886		10.83
$	15.46	$	20.01		447		16.66
$	20.02	$	49.91		4,921		23.83
					155,742		$ 7.92

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,

2016,

2015

and

2014.

	Years Ended December 31,
	2016			2015			2014
Expected volatility		24.23	%		31.21	%		34.25	%
Weighted-Average volatility		24.23	%		31.21	%		34.25	%
Expected dividends		-			-			-
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 date and the end of the contractual term of the award.

The total intrinsic value of outstanding stock options was

$11.4

million and

$12.2

million, respectively, at

December

31,

2016

and

2015.

The total fair value of stock options vested was

$66

thousand,

$90

thousand and

$10.1

million (including

$10.0

million of assumed stock options issued under the Virginia Heritage Plans), for

2016,

2015

and

2014,

respectively. Unrecognized stock-based compensation expense related to stock options totaled

$128

thousand at

December

31,

2016.

At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was

2.74

years.

Cash proceeds, tax benefits and intrinsic value related to total stock options exercised is as follows:

	Years Ended December 31,
(dollars in thousands)	2016		2015		2014

Proceeds from stock options exercised	$	955	$	5,176	$	2,313
Tax benefits realized from stock compensation		400		2,984		978
Intrinsic value of stock options exercised		2,824		11,042		3,184

The Company has unvested restricted stock awards and PRSU grants of

296,192

shares under the

2006

Plan at

December

31,

2016.

Unrecognized stock based compensation expense related to restricted stock awards totaled

$4.8

million at

December

31,

2016.

At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was

1.81

years. The following table summarizes the unvested restricted stock awards at

December

31,

2016

and

2015:

	Years Ended December 31,
	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		(10,480	)		40.28		(8,490	)		33.57
Vested		(202,153	)		23.22		(209,823	)		21.47
Unvested at end		296,192		$	34.61		369,093		$	24.43

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

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

December

31,

2016,

the

2011

ESPP had

416,543

shares remaining for issuance.

Included in salaries and employee benefits in the accompanying Consolidated Statements of Operations,

the Company recognized

$6.9

million,

$5.1

million and

$4.0

million in stock-based compensation expense for

2016,

2015

and

2014,

respectively. Stock-based compensation expense is recognized ratably over the requisite service period for all awards.