(9.) 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 first quarter of 2017.


			Weighted
			Average
	Number of		Per Share
	Underlying		Grant Date
	Shares		Fair Value
RSUs	25,331	$	32.22
PSUs	12,531		33.07

The grant-date fair value for the RSUs granted during the three month period ended March 31, 2017 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, 2019. The shares earned based on the achievement of the TSR performance requirement, if any, will vest on February 22, 2020 assuming the recipient's continuous service to the Company.

The grant-date fair value of the PSUs granted during the three month period ended March 31, 2017 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 1.45%, (iii) expected dividend yield of 2.41% and (iv) expected stock price volatility over the expected term of the TSR award of 21.9%. The Monte Carlo simulation model is a risk analysis method that selects a random value from a range of estimates.

The Company previously granted restricted stock awards to certain members of management. There were no restricted stock awards granted during the quarter ended March 31, 2017. The following is a summary of restricted stock award and restricted stock units activity for the three month period ended March 31, 2017:


				Weighted
				Average
				Market
	Number of			Price at
	Shares			Grant Date
Outstanding at beginning of year	114,565		$	19.90
Granted	41,229			31.82
Vested	(16,393	)		21.19
Forfeited	(10,159	)		11.56
Outstanding at end of period	129,242		$	24.20

At March 31, 2017, there was $2.2 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 2.4 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 the first three months of 2017 or 2016. There was no unrecognized compensation expense related to unvested stock options as of March 31, 2017. The following is a summary of stock option activity for the three months ended March 31, 2017 (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	49,099		$	19.00
Exercised	(12,500	)		19.44
Expired	-			-
Outstanding and exercisable at end of period	36,599		$	18.85	0.8	$	516

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 three months ended March 31, 2017 and 2016 was $180 thousand and $126 thousand, respectively. The total cash received as a result of option exercises under stock compensation plans for the three months ended March 31, 2017 and 2016 was $243 thousand and $288 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
	March 31,
		2017		2016
Salaries and employee benefits	$	207	$	98
Other noninterest expense		32		31
Total share-based compensation expense	$	239	$	129