SHARE-BASED COMPENSATION

Stock options and RSAs have been issued to directors, officers and other management employees under the Corporation's 1999 Long-term Equity Incentive Plan and the 2009 Long-term Equity Incentive Plan. The stock options, which have a ten year life, become 100 percent vested ranging from six months to two years and are fully exercisable when vested. Option exercise prices equal the Corporation's common stock closing price on NASDAQ on the date of grant. RSAs issued to employees and non-employee directors provide for the issuance of shares of the Corporation's common stock at no cost to the holder and generally vest after three years. The RSAs vest only if the employee is actively employed by the Corporation on the vesting date and, therefore, any unvested shares are forfeited. For non-employee directors, the RSAs vest only if the non-employee director remains as an active board member on the vesting date and, therefore, any unvested shares are forfeited. RSAs for employees and non-employee directors retired from the Corporation are either immediately vested at retirement or continue to vest after retirement, depending on the plan under which the shares were granted. Deferred Stock Units ("DSU") can be credited to non-employee directors who have elected to defer payment of compensation under the Corporation's 2008 Equity Compensation Plan for Non-employee Directors. DSUs credited are equal to the restricted shares that the non-employee director would have received under the plan. As of March 31, 2017, there were no outstanding DSUs.

The Corporation’s 2009 ESPP provides eligible employees of the Corporation and its subsidiaries an opportunity to purchase shares of common stock of the Corporation through quarterly offerings financed by payroll deductions. The price of the stock to be paid by the employees shall be equal to 85 percent of the average of the closing price of the Corporation’s common stock on each trading day during the offering period. However, in no event shall such purchase price be less than the lesser of an amount equal to 85 percent of the market price of the Corporation’s stock on the offering date or an amount equal to 85 percent of the market value on the date of purchase. Common stock purchases are made quarterly and are paid through advance payroll deductions up to a calendar year maximum of $25,000.

Compensation expense related to unvested share-based awards is recorded by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards, with no change in historical reported fair values and earnings. Awards are valued at fair value in accordance with provisions of share-based compensation guidance and are recognized on a straight-line basis over the service periods of each award. To complete the exercise of vested stock options, RSA’s and ESPP options, the Corporation generally issues new shares from its authorized but unissued share pool. Share-based compensation for the three months ended March 31, 2017 was $573,000 compared to $593,000 for the three months ended March 31, 2016. Share-based compensation has been recognized as a component of salaries and benefits expense in the accompanying Consolidated Condensed Statements of Income.

The estimated fair value of the stock options granted during 2014 and in prior years was calculated using a Black Scholes option pricing model. There have been no stock options granted since 2014.

The Black Scholes model incorporates assumptions to value share-based awards. The risk-free rate of interest, for periods equal to the expected life of the option, is based on a U.S. government instrument over a similar contractual term of the equity instrument. Expected price volatility is based on historical volatility of the Corporation’s common stock. In addition, the Corporation generally uses historical information to determine the dividend yield and weighted-average expected life of the options until exercise. Separate groups of employees that have similar historical exercise behavior with regard to option exercise timing and forfeiture rates are considered separately for valuation and attribution purposes.

Share-based compensation expense recognized in the Consolidated Condensed Statements of Income is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Share-based compensation guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be approximately 2.8 percent for the three months ended March 31, 2017, based on historical experience.

The following table summarizes the components of the Corporation's share-based compensation awards recorded as expense and the income tax benefit of such awards. The income tax benefit increase in the three months ended March 31, 2017 is due to the implementation of ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU

requires all income tax effects of awards to be recognized as income tax expense or benefit in the income statement when the awards vest or are settled. Implementation of the ASU was effective January 1, 2017 and resulted in approximately $772,000 of income tax benefit in the first quarter.



	Three Months Ended March 31,
	2017			2016
Stock and ESPP Options
Pre-tax compensation expense	$	48		$	15
Income tax expense (benefit)	(246		)
Stock and ESPP option expense, net of income taxes	$	(198	)	$	15
Restricted Stock Awards
Pre-tax compensation expense	$	525		$	578
Income tax benefit	(710		)	(202		)
Restricted stock awards expense, net of income taxes	$	(185	)	$	376
Total Share-Based Compensation
Pre-tax compensation expense	$	573		$	593
Income tax benefit	(956		)	(202		)
Total share-based compensation expense, net of income taxes	$	(383	)	$	391

As of March 31, 2017, unrecognized compensation expense related to RSAs was $3,087,000 and is expected to be recognized over a weighted-average period of 1.55 years. The Corporation did not have any unrecognized compensation expense related to stock options as of March 31, 2017.

Stock option activity under the Corporation's stock option plans as of March 31, 2017 and changes during the three months ended March 31, 2017, were as follows:



	Number of Shares		Weighted-Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2017	260,211		$	19.26
Granted
Exercised	(80,835	)	$	22.76
Canceled
Outstanding March 31, 2017	179,376		$	17.68	2.86	3,882,228
Vested and Expected to Vest at March 31, 2017	179,376		$	17.68	2.86	3,882,228
Exercisable at March 31, 2017	179,376		$	17.68	2.86	3,882,228

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Corporation's closing stock price on the last trading day of the first three months of 2017 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their stock options on March 31, 2017. The amount of aggregate intrinsic value will change based on the fair market value of the Corporation's common stock. The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2017 and 2016 was $1,823,000 and $77,000, respectively. Cash receipts of stock options exercised during this same period were $1,314,000 and $73,000, respectively.

The following table summarizes information on unvested RSAs outstanding as of March 31, 2017:



	Number of Shares		Weighted-Average Grant Date Fair Value
Unvested RSAs at January 1, 2017	328,347		$	22.87
Granted	3,332		$	39.32
Vested	(76,951	)	$	20.43
Forfeited	(2,682	)	$	23.02
Unvested RSAs at March 31, 2017	252,046		$	23.83

The grant date fair value of ESPP options was estimated at the beginning of the January 1, 2017 quarterly offering period of approximately $48,000. The ESPP options vested during the three months ending March 31, 2017, leaving no unrecognized compensation expense related to unvested ESPP options at March 31, 2017.