. Share-Based Payments

Purchase Plan

Through

December 31, 2016,

he Purchase Plan allowed employees through payroll withholding to purchase shares of the Company’s common stock at a

15%

discount from the average market price on the last day of a six-month investment period. Under ASC Topic

718,

Compensation—Stock Compensation

(ASC

718

)

the Company was required to record compensation expense related to the

15%

discount. The

15%

discount resulted in compensation expense of

$173,000

2016

and

$184,000

2015.

For purchase periods beginning after

January 1, 2017,

the purchase price is

100%

of the market price at the end of each

six

-month purchase period.

Stock Options Granted Under the

1999

Incentive Plan

he Company granted

2,041,500

options for the purchase of the Company’s common stock under the

1999

Stock Incentive Plan (

1999

Incentive Plan). The exercise price of the options granted was the average market price of the Company’s common stock on the grant date. Under ASC

718

accounting requirements, compensation expense is recorded based on the estimated fair value of the options on their grant date using a fair-value option pricing model. Under ASC

718

accounting requirements, the fair value of the options granted has been recorded as compensation expense over the requisite service period (the vesting period of the options). The estimated fair value of all options granted under the

1999

Incentive Plan was based on the Black-Scholes option pricing model. There were

options outstanding as of

December 31

of each of the years,

2017,

2016

2015.

Presented below is a summary of the stock options activity:

Stock Options Activity	201 7			201 6			20 15
	Options		Average Exercise Price	Options		Average Exercise Price	Options		Average Exercise Price
Outstanding, Beginning of Year		--			--			12,750	$	24.93
Exercised		--			--			10,250		24.93
Forfeited or Expired		--			--			2,500		24.93
Outstanding, End of Year		--			--			--
Exercisable, End of Year		--			--			--
Cash Received for Options Exercised									$	256,000
Intrinsic Value of Options Exercised									$	75,000

Restricted Stock Granted to Directors

Under the

1999

Incentive Plan and the

2014

Incentive Plan, restricted shares of the Company’s common stock were granted to members of the Company’s board of directors as a form of compensation. All remaining restricted shares issued under the

1999

Incentive Plan vested on

April 8, 2017.

Under ASC

718

accounting requirements, compensation expense related to restricted shares is based on the fair value of the restricted shares on their grant dates. On

April 10, 2017,

17,600

shares of restricted stock were granted to the Company’s nonemployee directors. The grant-date fair value of each share of restricted stock granted on

April 10, 2017

was

$37.75

per share, the average of the high and low market price on the date of grant. The restricted shares granted in

2017

vest

25%

per year on

April 8

of each year in the period

2018

through

2021

and are eligible for full dividend and voting rights. Restricted shares

not

vested and dividends on those restricted shares are subject to forfeiture under the terms of the restricted stock award agreement.

Presented below is a summary of the status of directors

’ restricted stock awards for the years ended

December 31:

Directors ’ Restricted Stock Awards	201 7				201 6				20 15
	Shares		Weighted Average Grant-Date Fair Value		Shares		Weighted Average Grant-Date Fair Value		Shares		Weighted Average Grant-Date Fair Value
Nonvested, Beginning of Year		46,334	$	29.71		38,217	$	29.78		38,050	$	27.47
Granted		17,600		37.75		23,200		28.66		15,200		31.775
Vested		17,134		29.93		15,083		28.28		15,033		25.96
Forfeited		--				--				--
Nonvested, End of Year		46,800		32.65		46,334		29.71		38,217		29.78
Compensation Expense Recognized			$	658,000			$	491,000			$	417,000
Fair Value of Shares Vested in Year			$	513,000			$	427,000			$	390,000

Restricted Stock Granted to Employees

Under the

1999

Incentive Plan and

2014

Incentive Plan, restricted shares of the Company’s common stock have been granted to employees as a form of compensation. All remaining restricted shares issued under the

1999

Incentive Plan vested on

April

2017.

Under ASC

718

accounting requirements, compensation expense related to restricted shares is based on the fair value of the restricted shares on their grant dates.

shares of restricted stock have been granted to employees since

2014.

Presented below is a summary of the status of employees

’ restricted stock awards for the years ended

December 31:

Employees ’ Restricted Stock Awards	201 7				201 6				201 5
	Shares		Weighted Average Grant-Date Fair Value		Shares		Weighted Average Grant-Date Fair Value		Shares		Weighted Average Grant-Date Fair Value
Nonvested, Beginning of Year		7,180	$	29.72		13,581	$	28.56		45,280	$	27.46
Granted		--				--				--
Vested		4,285		29.94		6,401		27.25		31,699		27.09
Forfeited		--				--				--
Nonvested, End of Year		2,895		29.41		7,180		29.72		13,581		28.56
Compensation Expense Recognized			$	70,000			$	96,000			$	359,000
Fair Value of Awards Vested			$	128,000			$	174,000			$	859,000

Restricted Stock Units Granted to Executive Officers

February 2, 2017,

15,900

restricted stock units under the

2014

Incentive Plan were granted to the Company’s executive officers. The grant-date fair value of each restricted stock unit was

$37.65

per share, the average of the high and low market price on the date of grant. The restricted stock units granted to executive officers in

2017

vest

25%

per year on

February 6

of each year in the period

2018

through

2021

and are eligible to receive dividend equivalent payments on all unvested awards over the awards’ respective vesting periods, subject to forfeiture under the terms of the restricted stock unit award agreements. The vesting of restricted stock units is accelerated in the event of a change in control, disability, death or retirement, subject to proration on retirement in certain cases.

Presented below is a summary of the status of restricted stock unit awards granted to executive officers for the years ended

December 31:

Executives ’ Restricted Stock Unit Awards	2017				2016				2015
	Shares		Weighted Average Grant-Date Fair Value		Shares		Weighted Average Grant-Date Fair Value		Shares		Weighted Average Grant-Date Fair Value
Nonvested, Beginning of Year		41,825	$	30.23		24,300	$	31.682		--
Granted		15,900		37.65		22,000		28.915		29,100	$	31.681
Vested		9,975		30.16		4,475		31.69		4,800		31.675
Forfeited		--				--				--
Nonvested, End of Year		47,750		32.71		41,825		30.23		24,300		31.682
Compensation Expense Recognized			$	576,000			$	446,000			$	452,000
Fair Value of Awards Vested			$	301,000			$	142,000			$	152,000

Restricted Stock Units Granted to Employees

201

the following restricted stock unit awards under the

2014

Incentive Plan were granted to key employees of the Company who are

not

executive officers:

	Grant Date	Units Granted		Grant-Date Fair Value per Award
Restricted Stock Units Vesting 100% on April 8, 20 21	April 1 0, 2017		9,995	$	32.78
Restricted Stock Units Vesting 100% on April 8, 20 21	September 2 5, 2017		1,000	$	38.29

The grant

-date fair value of each restricted stock unit was based on the average of the high and low market price of the Company’s common stock on the date of grant, discounted for the value of the dividend exclusion over the

four

-year vesting period. Under the terms of the restricted stock unit award agreements, all outstanding (unvested) restricted stock units held by a retiring grantee vest immediately on normal retirement.

Presented below is a summary of the status of employees

’ restricted stock unit awards for the years ended

December 31:

Employee s’ Restricted Stock Unit Awards	201 7				201 6				201 5
	Restricted Stock Units		Weighted Average Grant-Date Fair Value		Restricted Stock Units		Weighted Average Grant-Date Fair Value		Restricted Stock Units		Weighted Average Grant-Date Fair Value
Nonvested, Beginning of Year		47,370	$	25.19		46,600	$	23.75		45,900	$	21.82
Granted		10,995		33.28		17,220		24.54		15,650		25.89
Vested		11,550		25.30		12,250		19.03		12,250		19.46
Forfeited		375		26.92		4,200		24.51		2,700		22.84
Nonvested, End of Year		46,440		27.07		47,370		25.19		46,600		23.75
Compensation Expense Recognized			$	331,000			$	307,000			$	304,000
Fair Value of Awards Vested			$	292,000			$	233,000			$	238,000

Stock Performance Awards granted to Executive Officers

Agreements for s

tock performance awards have been granted under the

2014

Incentive Plan for the Company’s executive officers. Under these agreements, the officers could be awarded shares of the Company’s common stock based on the Company’s total shareholder return relative to that of its peer group of companies in the Edison Electric Institute (EEI) Index over a

three

-year period beginning on

January 1

of the year the awards are granted. The awards also include a performance incentive based on the Company’s average

-year adjusted return on equity (ROE) relative to a targeted average

-year adjusted ROE. The number of shares earned, if any, will be awarded and issued at the end of each

three

-year performance measurement period. The participants have

voting or dividend rights under these award agreements until common shares, if any, are issued at the end of the performance measurement period.

February

2017

performance share awards were granted to the Company’s executive officers under the

2014

Incentive Plan for the

2017

2019

performance measurement period. Under the

2017

performance share award agreements the aggregate award for performance at target is

59,500

shares. For target performance the participants would earn an aggregate of

39,667

common shares based on the Company’s total shareholder return relative to the total shareholder return of the companies that comprise the EEI Index over the performance measurement period of

January 1, 2017

through

December 31, 2019,

with the beginning and ending share values based on the average closing price of a share of the Company’s common stock for the

trading days immediately following

January 1, 2017

and the average closing price for the

trading days immediately preceding

January 1, 2020.

The participants would also earn an aggregate of

19,833

common shares for achieving the target set for the Company’s

-year average adjusted ROE. Actual payment

may

range from

zero

150%

of the target amount, or up to

89,250

common shares.

The grant-date fair value of each performance share award was determined using a Monte Carlo fair valuation simulation model resulting in a weighted average fair value of

$30.25

per share, except for

one

grantee whose performance shares were fair valued at

$36.27

per share due to retirement provisions in his award agreement.

Under the

201

performance award agreements payment in the event of retirement, resignation for good reason or involuntary termination without cause is to be made at the end of the performance period based on actual performance, subject to proration in certain cases, except that the payment of performance awards granted to certain officers who are parties to executive employment agreements with the Company is to be made at target at the date of any such event. The vesting of these performance awards is accelerated and paid at target in the event of a change in control, disability or death and on retirement at or after age

for certain officers who are parties to executive employment agreements with the Company. The terms of these awards are such that the entire award will be classified and accounted for as equity, as required under ASC

718,

and recognized over the grantee’s requisite service period based on the grant-date fair value of the award.

The table below provides a summary of stock performance awards granted and amounts expensed related to the stock performance awards:

Performance Period	Maximum Shares Subject To Award		Target Shares		Expense Recognized in the Year Ended December 31,							Earned Shares
					201 7		201 6		201 5
2017-2019		89,250		59,500	$	854,000							7,500
2016-2018		122,250		81,500		580,000	$	798,000					11,100
2015-2017		126,450		84,300		573,000		535,000	$	943,000			114,648
2014-2016		159,450		106,300		--		332,000		(64,000	)		121,491
2013-2015		90,600		45,300		--		--		(445,000	)		22,500
Total					$	2,007,000	$	1,665,000	$	434,000			277,239

Stock-based payment expense recognized in

2017,

2016

and

2015

for the

2017

2019,

2016

2018

and

2015

2017

performance awards reflects the accelerated recognition of expense for outstanding and unvested awards of executives who are eligible for retirement and whose awards vest on normal retirement, as defined in the performance award agreements, prior to the vesting dates of the awards.

The earned shares shown in the table above for the

2016

2018

and

2017

2019

performance periods include

vested shares to be issued in

2018

to a participant who retired on

December 31, 2017

and had reached age

prior to retirement.

The earned shares shown in the table above for the

2015

2017

performance period include shares received in

2018

by participants in the plan based on the Company achieving a total shareholder return ranking of

out of

companies in the EEI Index and an average

-year adjusted return on equity of

10.1

relative to a targeted average

-year adjusted return on equity of

10.00%

resulting payout at

136.00%

of target.

The earned shares shown in the

table above for the

2014

2016

performance period include shares received in

2017

by participants in the plan based on the Company achieving a total shareholder return ranking of

out of

companies in the EEI Index and a resulting payout at

114.29%

of target. The earned shares also include shares for a portion of the award that vested on normal retirement of the Company’s former CEO on

July 1, 2015

that were issued in

2016

following the

180

day deferral period required under the Internal Revenue Code at a value of

$26.35

per share or

$848,000.

The

earned shares shown in the table above for the

2013

2015

performance period reflect shares that vested on normal retirement of the Company’s former CEO on

July 1, 2015

that were issued in

2016

following the

180

day deferral period required under the Internal Revenue Code at a value of

$26.35

per share or

$593,000.

In connection with the resignation of

an executive officer in

May 2014,

the following unvested stock performance awards were forfeited:

8,900

granted in

2014

and

4,900

granted in

2013.

As of

December 31,

2017

the total remaining unrecognized amount of compensation expense related to stock-based compensation for all of the Company’s stock-based payment programs was approximately

$4.0

million (before income taxes), which will be amortized over a weighted average period of

2.0

years.