(9.) SHARE-BASED COMPENSATION PLANS

The Company maintains certain stock-based compensation plans that were approved by the Companys shareholders and are administered by the Companys Board of Directors, or the Management Development and Compensation Committee of the Board. The share-based compensation plans were established to allow for the grant of compensation awards to attract, motivate and retain employees, executive officers and non-employee directors who contribute to the success and profitability of the Company and to give such persons a proprietary interest in the Company, thereby enhancing their personal interest in the Companys success.

The Company awarded grants of 22,642 shares of restricted common stock to certain members of management during the nine months ended September 30, 2014. Fifty percent of the shares subject to each grant will be earned based upon achievement of an EPS performance requirement for the Companys fiscal year ended December 31, 2014. The remaining fifty percent of the shares will be earned based on the Companys achievement of a relative total shareholder return (TSR) performance requirement, on a percentile basis, compared to a defined group of peer companies over a three-year performance period ended December 31, 2016. The shares earned based on the achievement of the EPS and TSR performance requirements, if any, will vest based on the recipients continuous service to the Company on December 31, 2016.

The grant date fair value of the TSR portion of the award granted during the nine months ended September 30, 2014 was determined using the Monte Carlo simulation model on the date of grant, assuming the following (i) expected term of 2.87 years, (ii) risk free interest rate of 0.62%, (iii) expected dividend yield of 3.59% and (iv) expected stock price volatility over the expected term of the TSR award of 39.4%. The model resulted in a grant date fair value of $10.54 for the TSR portion of the award. The grant date fair value of all other restricted stock awards is equal to the closing market price of our common stock on the date of grant.

In addition, the Company granted 11,600 shares of restricted common stock to management during the nine months ended September 30, 2014. The shares will vest after completion of a three-year service requirement. The weighted average market price of the restricted stock awards on the date of grant was $21.26.

During the nine months ended September 30, 2014, the Company granted 9,000 restricted shares of common stock to directors, of which 4,500 shares vested immediately and 4,500 shares will vest after completion of a one-year service requirement. The market price of the restricted stock on the date of grant was $22.82.

The restricted stock awards granted to management and directors in 2014 do not have rights to dividends or dividend equivalents.

The following is a summary of restricted stock award activity for the nine month period ended September 30, 2014:


				Weighted
				Average
				Market
	Number of			Price at
	Shares			Grant Date
Outstanding at beginning of year	65,040		$	16.92
Granted	43,242			18.76
Vested	(33,728	)		18.17
Forfeited	(13,609	)		18.04
Outstanding at end of period	60,945		$	17.28

As of September 30, 2014, there was $578 thousand of unrecognized compensation expense related to unvested restricted stock awards that is expected to be recognized over a weighted average period of 1.8 years.

The Company uses the Black-Scholes valuation method to estimate the fair value of its stock option awards. There were no stock options awarded during 2014 or 2013. The following is a summary of stock option activity for the nine months ended September 30, 2014 (dollars in thousands, except per share amounts):


					Weighted
				Weighted	Average
				Average	Remaining		Aggregate
	Number of			Exercise	Contractual		Intrinsic
	Options			Price	Term		Value
Outstanding at beginning of year	192,934		$	19.83
Exercised	(8,467	)		18.87
Expired	(23,436	)		23.64
Outstanding and exercisable at end of period	161,031		$	19.34	2.1	$	506

The aggregate intrinsic value (the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant) of option exercises for the nine months ended September 30, 2014 and 2013 was $35 thousand and $9 thousand, respectively. The total cash received as a result of option exercises under stock compensation plans for the nine months ended September 30, 2014 and 2013 was $160 thousand and $66 thousand, respectively.

The Company amortizes the expense related to restricted stock awards over the vesting period. Share-based compensation expense is recorded as a component of salaries and employee benefits in the consolidated statements of income for awards granted to management and as a component of other noninterest expense for awards granted to directors. The share-based compensation expense included in the consolidated statements of income is as follows (in thousands):


	Three months ended				Nine months ended
	September 30,				September 30,
		2014		2013		2014		2013
Salaries and employee benefits	$	52	$	85	$	208	$	164
Other noninterest expense		26		22		175		148
Total share-based compensation expense	$	78	$	107	$	383	$	312