Shareholders’ Equity

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi- year schedule and fully phased in by January 1, 2019. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0% for 2015 to 2.5% on January 1, 2019. The capital conservation buffer for 2017 is 1.25% and for 2016 is 0.625%. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. At December 31, 2017, the Company and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications, including well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year end 2017 and 2016, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.

At December 31, 2017, consolidated and bank actual capital and minimum required levels are presented below:



	Actual:				Minimum Required For Capital Adequacy Purposes:				Minimum Required To Be Well-Capitalized Under Prompt Corrective Action Regulations:
	Amount		Ratio		Amount		Ratio ⁽¹⁾		Amount		Ratio
Total Capital (to Risk Weighted Assets)
Consolidated	$	339,391	13.62	%	$	199,363	8.00	%	N/A		N/A
Bank	305,773		12.29		199,093		8.00		$	248,866	10.00	%

Tier 1 (Core) Capital (to Risk Weighted Assets)
Consolidated	$	323,697	12.99	%	$	149,522	6.00	%	N/A		N/A
Bank	290,079		11.66		149,320		6.00		$	199,093	8.00	%

Common Tier 1, (CET 1) Capital Ratio (to Risk Weighted Assets)
Consolidated	$	312,637	12.55	%	$	112,142	4.50	%	N/A		N/A
Bank	290,079		11.66		111,990		4.50		$	161,763	6.50	%

Tier 1 Core Capital (to Average Assets)
Consolidated	$	323,697	10.71	%	$	120,862	4.00	%	N/A		N/A
Bank	290,079		9.63		120,509		4.00		$	150,637	5.00	%

⁽¹⁾ Excludes capital conservation buffer.

At December 31, 2016, consolidated and bank actual capital and minimum required levels are presented below:



	Actual:				Minimum Required For Capital Adequacy Purposes:				Minimum Required To Be Well-Capitalized Under Prompt Corrective Action Regulations:
	Amount		Ratio		Amount		Ratio ⁽¹⁾		Amount		Ratio
Total Capital (to Risk Weighted Assets)
Consolidated	$	307,754	13.30	%	$	185,117	8.00	%	N/A		N/A
Bank	288,793		12.48		185,104		8.00		$	231,380	10.00	%

Tier 1 (Core) Capital (to Risk Weighted Assets)
Consolidated	$	292,946	12.66	%	$	138,838	6.00	%	N/A		N/A
Bank	273,985		11.84		138,828		6.00		$	185,104	8.00	%

Common Tier 1, (CET 1) Capital Ratio (to Risk Weighted Assets)
Consolidated	$	282,138	12.19	%	$	104,129	4.50	%	N/A		N/A
Bank	273,985		11.84		104,121		4.50		$	150,397	6.50	%

Tier 1 Core Capital (to Average Assets)
Consolidated	$	292,946	10.09	%	$	116,165	4.00	%	N/A		N/A
Bank	273,985		9.46		115,853		4.00		$	144,816	5.00	%

⁽¹⁾ Excludes capital conservation buffer.

The Company and the bank at year end 2017 and 2016 were categorized as well-capitalized. There have been no conditions or events that management believes has changed the classification of the bank under the prompt corrective action regulations since the last notification from regulators. Regulations require the maintenance of certain capital levels at the bank, and may limit the dividends payable by the affiliate to the holding company, or by the holding company to its shareholders. At December 31, 2017 the bank had $64,000 in retained earnings available for payment of dividends to the parent company without prior regulatory approval.

Equity Plans and Equity Based Compensation

The Company maintains three equity incentive plans under which stock options, restricted stock, and other equity incentive awards can be granted. At December 31, 2017, the Company has reserved 386,754 shares of Common Stock (as adjusted for subsequent stock dividends and subject to further customary anti-dilution adjustments) for the purpose of issuance pursuant to outstanding and future grants of options, restricted stock, and other equity awards to officers, directors and other employees of the Company.

Stock Options

Options may be designated as incentive stock options or as nonqualified stock options. While the date after which options are first exercisable is determined by the appropriate committee of the Board of Directors of the Company or, in the case of options granted to directors, by the Board of Directors, no stock option may be exercised after ten years from the date of grant (twenty years in the case of nonqualified stock options). The exercise price of stock options granted pursuant to the plans must be no less than the fair market value of the Common Stock on the date of the grant.

The plans authorize an optionee to pay the exercise price of options in cash or in common shares of the Company or in some combination of cash and common shares. An optionee may tender already-owned common shares to the Company in exercise of an option. Certain of these plans authorize an optionee to surrender the value of an unexercised option in payment of an equivalent amount of the exercise price of the option. The Company typically issues authorized but unissued common shares upon the exercise of options.

The following table presents information related to stock options under the Company’s equity incentive plan during the years ended 2017, 2016 and 2015:



	2017		2016		2015

Intrinsic Value of Options Exercised	$	—	$	137	$	559
Cash Received from Option Exercises	$	—	$	—	$	—
Tax Benefit of Option Exercises	$	—	$	54	$	224
Weighted Average Fair Value of Options Granted	$	—	$	—	$	—

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of common stock as of the reporting date.

During 2017, 2016 and 2015, the Company granted no options, and recorded no stock compensation expense related to option grants. The Company recorded no other stock compensation expense applicable to options during the years ended December 31, 2017, 2016 and 2015 because all outstanding options were fully vested prior to 2007.

Restricted Stock

During the periods presented, awards of long-term incentives were granted in the form of restricted stock. Awards that were granted to management and selected other employees under a management and employee incentive plan were granted in tandem with cash credit entitlements (typically in the form of 60% restricted stock grants and 40% cash credit entitlements). The management and employee restricted stock grants and tandem cash credit entitlements awarded will vest in three equal installments of 33.3% with the first annual vesting on December 5th of the year of the grant and on December 5th of the next two succeeding years. Awards that were granted to directors as additional retainer for their services do not include any cash credit entitlement. These director restricted stock grants are subject to forfeiture in the event that the recipient of the grant does not continue in service as a director of the Company through December 5th of the year after grant or do not satisfy certain meeting attendance requirements, at which time they generally vest 100 percent. For measuring compensation costs, restricted stock awards are valued based upon the market value of the common shares on the date of grant.

The following table presents expense recorded for restricted stock and cash entitlements as well as the related tax effect for the years ended 2017, 2016, and 2015:



	2017			2016			2015

Restricted Stock Expense	$	1,246		$	1,407		$	963
Cash Entitlement Expense	657			570			580
Tax Effect	(746		)	(782		)	(615		)
Net of Tax	$	1,157		$	1,195		$	928

Unrecognized expense associated with the restricted stock grants and cash entitlements totaled $1,983, $1,774, and $1,542 as of December 31, 2017, 2016, and 2015, respectively.

The following table presents information on restricted stock grants outstanding for the period shown:



	Year Ended December 31, 2017
	Restricted Shares		Weighted Average Market Price at Grant

Outstanding at Beginning of Period	53,163		$	22.32
Granted	43,386		31.77
Issued and Vested	(49,733	)	24.79
Forfeited	(510	)	27.22
Outstanding at End of Period	46,306		$	28.47

Employee Stock Purchase Plan

The Company maintains an Employee Stock Purchase Plan whereby eligible employees have the option to purchase the Company’s common stock at a discount. The purchase price of the shares under this Plan has been set at 95% of the fair market value of the Company’s common stock as of the last day of the plan year. The plan provided for the purchase of up to 750,000 shares of common stock, which the Company may obtain by purchases on the open market or from private sources, or by issuing authorized but unissued common shares. At December 31, 2017, there were 557,203 shares available for future issuance under this plan. Funding for the purchase of common stock is from employee and Company contributions.

In 2017, the Company recorded $32 of expense, $19 net of tax, for the employee stock purchase plan. In 2016, the Company recorded $82 of expense, $50 net of tax, for the employee stock purchase plan. In 2015, the Company recorded $22 of expense, $13 net of tax, for the employee stock purchase plan. There was no unrecognized compensation expense as of December 31, 2017, 2016 and 2015 for the Employee Stock Purchase Plan.

Stock Repurchase Plan

On April 26, 2001, the Company announced that its Board of Directors approved a stock repurchase program for up to 911,631 of the outstanding Common Shares of the Company. Shares may be purchased from time to time in the open market and in large block privately negotiated transactions. The Company is not obligated to purchase any shares under the program, and the program may be discontinued at any time before the maximum number of shares specified by the program are purchased. The Board of Directors established no expiration date for this program. As of December 31, 2017, the Company had purchased 502,447 shares under the program. No shares were purchased under the program during the years ended December 31, 2017, 2016 and 2015.