Note 9— Equity Compensation

Our time-vested restricted stock awards and performance-based restricted stock awards are valued as liability awards, in accordance with fair value guidelines. We allow qualified individuals to elect to have taxes in excess of the minimum statutory requirements withheld from their awards and, therefore, the awards are classified as liability instruments under the ASC guidance on share based payment. Awards treated as liability instruments must be revalued each period until settled, and cost is accrued over the requisite service period and adjusted to fair value at each reporting period until settlement or expiration of the award. Grants were made in the first quarter of 2016 (the effect of which is included in the table below). We had unrecognized compensation expense of $1.9 million as of June 30, 2016 which will be recognized over the remaining requisite service period.

We recognized the following amounts in compensation expense and tax benefits for all of our stock-based awards and programs for the applicable periods ended June 30 (in thousands):

	Three Months Ended				Six Months Ended				Twelve Months Ended
	2016		2015		2016		2015		2016		2015
Compensation Expense	$	834	$	319	$	2,910	$	1,061	$	6,128	$	2,882
Tax Benefit Recognized	303		108		1,080		379		2,277		1,048

Time-Vested Restricted Stock Awards

Our time-vested restricted stock awards vest after a three-year period. No dividend rights accumulate during the vesting period. Time-vested restricted stock is valued at an amount equal to the fair market value of our common stock on the date of grant. If employment terminates during the vesting period because of death, retirement, or disability, the participant is entitled to a pro-rata portion of the time-vested restricted stock awards such participant would otherwise have earned, which is distributed following the date of termination, with the remainder of the award forfeited. If employment is terminated during the vesting period for reasons other than those listed above, the time-vested restricted stock awards will be forfeited on the date of the termination, unless the Board of Directors Compensation Committee determines, in its sole discretion, that the participant is entitled to a pro-rata portion of the award. In addition, if a change in control occurs during the vesting period, a pro-rata portion of the time-vested restricted stock awards will vest upon such change in control, and any portion of such awards that remains unvested immediately after the change in control will be forfeited.

A summary of time vested restricted stock activity under the plan for 2015 and 2016 is presented in the table below:

	2016				2015
			Weighted				Weighted
	Number of		Average Grant		Number of		Average Grant
	shares		Date Fair Value		shares		Date Fair Value
Outstanding at January 1,	55,600		$	24.60	41,000		$	21.89
Granted	18,400		29.53		19,000		30.40
Distributed	(18,500	)	21.36		(1,654	)	21.92
Forfeited shares	0				(2,746	)	25.91

Outstanding at June 30	55,500		$	27.31	55,600		$	24.60

Performance-Based Restricted Stock Awards

Performance-based restricted stock awards consisting of the right to receive a number of shares of common stock at the end of the restricted period (assuming performance criteria are met) are granted to qualified individuals. We estimate the fair value of outstanding restricted stock awards using a Monte Carlo option valuation model.

If employment terminates during the performance period because of death, retirement, or disability, the individual is entitled to a pro-rata portion of the performance-based restricted stock awards such individual would otherwise have earned. If employment is terminated during the performance period for reasons other than those listed above, the performance-based restricted stock awards will be forfeited on the date of the termination unless the Compensation Committee of the Board of Directors determines, in its sole discretion, that the individual is entitled to a pro-rata portion of such award. In addition, if a change in control occurs during the performance period, a pro-rata portion of the target performance-based restricted stock awards will vest and be distributed upon such change in control. At the end of the performance period, the number of shares earned, determined without regard to the special change in control vesting provisions will be determined and such amount, less the number of shares distributed upon the change in control, shall be distributed.

In connection with the Merger Agreement, we amended outstanding performance-based restricted stock awards to provide that, effective upon and subject to the occurrence of the Merger under the Merger Agreement, each performance-based restricted stock award outstanding immediately prior to the effective time of the Merger will be converted into the right to receive a lump sum in cash equal to the merger consideration under the Merger Agreement, multiplied by the target number of shares under the award. (See Note 13 for further discussion of the Merger Agreement).

Non-vested performance-based restricted stock awards (based on target number) as of June 30, 2016 and 2015 and changes during the six months ended June 30, 2016 and 2015 were as follows:

	2016				2015
	Number		Weighted		Number		Weighted
	of		Average Grant		of		Average Grant
	shares		Date Fair Value		shares		Date Fair Value
Outstanding at January 1,	69,021		$	24.38	63,300		$	21.74
Target shares granted	22,400		$	29.53	21,800		$	30.40
Shares issued in excess of target	18,403		$	21.36	3,653		$	30.55
Shares awarded	(43,036	)	$	21.36	(13,653	)	$	30.55
Forfeited shares	—		—		(6,079	)	$	24.10
Target shares not awarded	—		—		—		—

Granted, nonvested at June 30,	66,788		$	27.22	69,021		$	24.38

Stock Unit Plan for Directors

Our Stock Unit Plan for directors (Stock Unit Plan) provides a stock-based compensation program for directors. This plan enhances our ability to attract and retain competent and experienced directors and allows the directors the opportunity to accumulate compensation in the form of common stock units. The Stock Unit Plan also provides directors the opportunity to convert previously earned cash retirement benefits to common stock units. All eligible directors who had benefits under the prior cash retirement plan converted their cash retirement benefits to common stock units.

Each common stock unit earns dividends in the form of common stock units and can be redeemed for shares of common stock. In connection with the Merger Agreement, we amended the Stock Unit Plan to provide that, effective upon and subject to the occurrence of the Merger under the Merger Agreement, each stock unit outstanding immediately prior to the effective time of the Merger will be converted into the right to receive in cash the merger consideration under the Merger Agreement, with interest at the prime rate from the effective time of the Merger until the payment date under the plan. (See Note 13 for further discussion of the Merger Agreement).

The number of units granted annually is computed by dividing an annual credit (determined by the Compensation Committee) by the fair market value of our common stock on January 1 of the year the units are granted. Common stock unit dividends are computed based on the fair market value of our stock on the dividend’s record date. We record the related compensation expense at the time we make the accrual for the directors’ benefits as the directors provide services. Shares accrued to directors’ accounts and shares available for issuance under this plan at June 30, 2016 and 2015 are shown in the table below:

	2016	2015
Shares accrued to directors’ accounts	161,361	162,058
Shares available for issuance	656,737	685,996

Units accrued for service and dividends as well as units redeemed for common stock during the six months ended June 30, 2016 and 2015 are shown in the table below:

	2016	2015
Units accrued for service and dividends	24,935	26,965
Units redeemed for common stock	21,246	28,991