(10.)SHARE-BASED COMPENSATION PLANS

The Company maintains certain stock-based compensation plans, approved by the Company’s shareholders that are administered by 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 long-term growth 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 six months ended June 30, 2018.

Number of

Underlying

Weighted

Average

Per Share

Grant Date

Fair Value

RSUs

29,905

28.38

PSUs

14,855

27.25

The grant-date fair value for the RSUs granted during the six months ended June 30, 2018 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 total shareholder return (“TSR”) targets relative to the SNL Small Cap Bank & Thrift Index, a market index the MD&C Committee has selected as a peer group for this purpose. 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 & Thrift Index over a three-year performance period ended December 31, 2020. The shares earned based on the achievement of the TSR performance requirement, if any, will vest on February 27, 2021 assuming the recipient’s continuous service to the Company.

The grant-date fair value of the PSUs granted during the six months ended June 30, 2018 was determined using the Monte Carlo simulation model on the date of grant, assuming the following (i) expected term of 2.84 years, (ii) risk free interest rate of 2.39%, (iii) expected dividend yield of 2.83% and (iv) expected stock price volatility over the expected term of the TSR award of 21.2%. The Monte Carlo simulation model is a risk analysis method that selects a random value from a range of estimates.

During the six months ended June 30, 2018, the company issued a total of 2,724 shares of common stock in-lieu of cash for the annual retainer of five non-employee directors and granted a total of 7,370 restricted shares of common stock to non-employee directors, of which 3,690 shares vested immediately and 3,680 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 $33.90.

The following is a summary of restricted stock awards and restricted stock units activity for the six months ended June 30, 2018:

	Number of Shares			Weighted Average Market Price at Grant Date
Outstanding at beginning of year		130,586		$	24.32
Granted		52,130			28.84
Vested		(23,836	)		25.74
Forfeited		(24,701	)		11.22
Outstanding at end of period		134,179		$	28.24

At June 30, 2018, there was $2.3 million of unrecognized compensation expense related to unvested restricted stock awards and restricted stock units that is expected to be recognized over a weighted average period of 2.0 years.

(10.)SHARE-BASED COMPENSATION PLANS (Continued)

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 the first six months of 2018 or 2017. There was no unrecognized compensation expense related to unvested stock options as of June 30, 2018. The following is a summary of stock option activity for the six months ended June 30, 2018 (dollars in thousands, except per share amounts):

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at beginning of year		22,199		$	18.40
Exercised		(16,650	)		18.50
Expired		(3,999	)		19.00
Outstanding and exercisable at end of period		1,550		$	15.85		0.0	$	26

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 six months ended June 30, 2018 and 2017 was $222 thousand and $277 thousand, respectively. The total cash received as a result of option exercises under stock compensation plans for the six months ended June 30, 2018 and 2017 was $309 thousand and $379 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 June 30,				Six months ended June 30,
	2018		2017		2018		2017
Salaries and employee benefits	$	298	$	221	$	566	$	428
Other noninterest expense		159		145		193		177
Total share-based compensation expense	$	457	$	366	$	759	$	605