(9.) SHARE-BASED COMPENSATION PLANS

The Company maintains certain stock-based compensation plans that were approved by the Company's shareholders and are administered by the Company's Board of Directors or the Management Development and Compensation Committee (the "MD&C 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 Company's success.

The MD&C Committee approved the grant of restricted stock units ("RSUs") and performance share units ("PSUs") shown in the table below to certain members of management during the first nine months of 2016.


			Weighted
			Average
	Number of		Per Share
	Underlying		Grant Date
	Shares		Fair Value
RSUs	18,500	$	24.17
PSUs	24,084		24.37

The grant-date fair value for the RSUs granted during the nine month period ended September 30, 2016 is equal to the closing market price of our common stock on the date of grant reduced by the present value of the dividends expected to be paid on the underlying shares.

The number of PSUs that ultimately vest is contingent on achieving specified EPS targets and specified total shareholder return ("TSR") targets relative to the SNL Small Cap Bank & Thrifts Index. Thirty percent of the shares subject to each grant will be earned based upon achievement of an EPS performance requirement for the Company's fiscal year ended December 31, 2016. The remaining seventy percent of the shares will be earned based on the Company's achievement of a relative TSR performance requirement, on a percentile basis, compared to the SNL Small Cap Bank & Thrifts Index over a three-year performance period ended December 31, 2018. The shares earned based on the achievement of the EPS and TSR performance requirements, if any, will vest on February 24, 2019, assuming the recipient's continuous service to the Company.

The grant-date fair value for the EPS portion of the PSUs granted during the nine month period ended September 30, 2016 is equal to the closing market price of our common stock on the date of grant reduced by the present value of the dividends expected to be paid on the underlying shares. The grant-date fair value of the TSR portion of the PSUs granted during the nine month period ended September 30, 2016 was determined using the Monte Carlo simulation model on the date of grant, assuming the following (i) expected term of 2.85 years, (ii) risk free interest rate of 0.88%, (iii) expected dividend yield of 2.99% and (iv) expected stock price volatility over the expected term of the TSR award of 24.3%.

During the nine months ended September 30, 2016, the Company issued a total of 2,244 shares of common stock in-lieu of cash for the annual retainer of four non-employee directors and granted a total of 8,800 restricted shares of common stock to non-employee directors, of which 4,400 shares vested immediately and 4,400 shares will vest after completion of a one-year service requirement. The market price of the stock and restricted stock on the date of grant was $28.38.

The following is a summary of restricted stock awards, RSUs and PSUs activity for the nine month period ended September 30, 2016:


				Weighted
				Average
				Market
	Number of			Price at
	Shares			Grant Date
Outstanding at beginning of year	82,908		$	17.23
Granted	51,384			24.98
Vested	(10,770	)		25.11
Forfeited	(14,457	)		21.32
Outstanding at end of period	109,065		$	19.57

At September 30, 2016, the total unrecognized compensation cost related to the nonvested restricted stock awards, RSUs and PSUs granted and expected to vest was $1.2 million. This cost is expected to be recognized over a weighted-average period of 2.0 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 2016 or 2015. The following is a summary of stock option activity for the nine months ended September 30, 2016 (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	102,249		$	19.21
Exercised	(41,961	)		19.41
Expired	(3,389	)		19.72
Outstanding and exercisable at end of period	56,899		$	19.04	1.1	$	459

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, 2016 and 2015 was $342 thousand and $70 thousand, respectively. The total cash received as a result of option exercises under stock compensation plans for the nine months ended September 30, 2016 and 2015 was $814 thousand and $252 thousand, respectively.

The Company amortizes the expense related to stock-based compensation 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,
	2016		2015		2016		2015
Salaries and employee benefits	$	131	$	118	$	386	$	309
Other noninterest expense		34		32		211		211
Total share-based compensation expense	$	165	$	150	$	597	$	520