SHARE-BASED COMPENSATION

The Company accounts for its share-based compensation in accordance with ASC 718-10, Compensation – Stock Based Compensation. ASC 718-10 addresses all forms of share-based payment awards, including shares under employee stock purchase plans, stock options, restricted stock, and stock appreciation rights. ASC 718-10 requires all share-based payments to be recognized as expense, based upon their fair values, in the consolidated financial statements over the requisite service period of the awards.

Omnibus Equity Incentive Plan – The Company’s 2008 Omnibus Equity Incentive Plan (Equity Incentive Plan) authorized the issuance of 270,000 shares of its common stock. In addition, there were 64,500 shares that had not yet been issued or were forfeited, canceled, or unexercised at the end of the option term under the 2003 Stock Option Plan when it was frozen. These shares and any other shares that may be forfeited, canceled, or expired are available for any type of stock-based awards in the future under the Equity Incentive Plan. At December 31, 2012, 209,751 shares were available for future grants under the Equity Incentive Plan.

Awards under the Equity Incentive Plan may be subject to the achievement of performance goals based on specific business criteria set forth in the Equity Incentive Plan. If the performance goals are achieved, then continued service with the Company or one of its affiliates also will generally be required before the award becomes fully vested. Awards that are not subject to the achievement of performance goals will require continued service with the Company or one of its affiliates for specific time periods prior to full vesting of the award. The Compensation Committee of the Board of Directors will determine whether an award will be subject to the achievement of performance goals and, if so, which performance goals must be achieved.

Restricted Stock – During 2012, the Compensation Committee granted additional service- and performance-based awards under the Equity Incentive Plan. A total of 48,186 shares of restricted stock were granted to officers and key employees of the Company, of which 7,746 were shares of service-based and 40,440 were shares of performance-based awards. The 2012 service-based awards vest 33%, 33%, and 34% on May 1, 2014, 2015, and 2016, respectively, and the 2012 performance-based awards, if earned, will vest in the same manner.

The following table presents information related to the restricted stock grants for the three years ended December 31, 2012:



	Number of Shares Granted	Weighted- Average Grant-Date Fair Value		Fair Market Value on Date of Grant
Year ended December 31:	(Dollars in thousands except per share data)
2012	48,186	$	5.96	$	287,000
2011	54,915	5.62		309,000
2010	110,260	3.63		401,000

The expense for the restricted stock awards is being recorded over their service period which is 50 months from the date of grant. The Company estimates the impact of forfeitures based on its historical experience with previously granted restricted stock and will consider the impact of the forfeitures when determining the amount of expense to record for the restricted stock granted. The Company estimates the probable outcome of achieving its performance target related to the performance-based awards and revises the related expense accordingly. The Company reissued treasury shares to satisfy the restricted stock awards.

The following table presents the restricted stock activity for the year ended December 31, 2012:



	Number of Shares		Weighted- Average Grant-Date Fair Value
Unvested at December 31, 2011	175,639		$	4.97
Granted	48,186		5.96
Vested	(52,596	)	6.18
Forfeited	(50,492	)	5.21
Unvested at December 31, 2012	120,737		4.72

The compensation expense related to restricted stock for the years ended December 31, 2012, 2011, and 2010 totaled $160,000, $306,000, and $222,000, respectively. At December 31, 2012, the remaining unamortized cost of the restricted stock awards is reflected as a reduction in additional paid-in capital and totaled $570,000. This cost is expected to be recognized over a weighted-average period of 2.7 years. At December 31, 2012, the unvested restricted stock awards had an intrinsic value of $187,000, which represents the difference between the Company’s closing stock price on the last day of trading in 2012 and the fair market value on the grant dates.

Subsequent to December 31, 2012, 40,440 shares of performance-based restricted stock granted during 2012 were deemed unearned, and therefore, deemed forfeited by the Compensation Committee due to the Company not meeting its performance targets for the year ended December 31, 2012.

On February 25, 2013, the Compensation Committee and Chief Executive Officer, under authority delegated by the Compensation Committee, granted awards under the Equity Incentive Plan. A total of 59,430 shares of restricted stock were granted to officers and key employees of the Company at a grant date fair value of $7.60. The grants included 28,748 shares of restricted stock as performance-based awards. These awards are subject to the achievement of diluted earnings per share targets of the Company for the year ended December 31, 2013. The grants also included 30,682 shares of restricted stock as service-based awards. Both the earned performance-based awards, if any, and the service-based awards will vest as follows:



Date	Cumulative Percent Vested
May 1, 2015	33	%
May 1, 2016	66
May 1, 2017	100

Stock Options – The Company has two stock option plans (1998 Stock Option Plan and 2003 Stock Option Plan) under which shares of Company common stock were reserved for the grant of both incentive and non-qualified stock options to directors, officers, and employees. These plans were frozen in conjunction with the approval of the Equity Incentive Plan such that no new awards will be made under either of these plans. The stock option vesting periods and exercise and expiration dates were determined by the Compensation Committee of the Board of Directors at the time of the grant. The exercise price of the stock options is equal to the fair market value of the common stock on the grant date. All of the Company’s options under these plans are fully vested.

The Company’s 2008 Equity Incentive Plan allows for the grant of both incentive and non-qualified stock options to directors, officers, and employees. The stock option vesting periods and exercise and expiration dates are determined by the Compensation Committee at the time of the grant. The exercise price of the stock options is equal to the fair market value of the common stock on the grant date.

During 2012, the Compensation Committee granted 20,000 non-qualified options to purchase shares of the Company’s common stock at an exercise price of $4.40 per share, which was the closing price of the Company’s common stock on that date, to its President and Chief Executive Officer. The options vest ratably over four years on each anniversary date of the award and have a ten-year term. The fair value of the options granted was $2.42 and was estimated using the Black-Scholes option value model with the following assumptions:



	2012
Dividend yield	.91	%
Expected volatility %	57.33
Risk-free interest rate	1.58
Original expected life (in years)	7.9

The following table presents the activity related to options under the Company’s stock option plans for the year ended December 31, 2012:



	2012
	Number of Options		Weighted- Average Exercise Price
Outstanding at December 31, 2011	515,995		$	14.01
Granted	20,000		4.40
Exercised	—		—
Forfeited	(56,000	)	13.91
Expired unexercised	(72,200	)	13.76
Outstanding at December 31, 2012	407,795		13.59

For stock options outstanding at December 31, 2012, the range of exercise prices was $4.40 to $14.76, and the weighted-average remaining contractual term was 1.7 years. At December 31, 2012, 387,595 of the Company’s outstanding stock options were fully vested and out-of-the-money with no intrinsic value. The remaining 20,000 stock options were not yet exercisable and were in-the-money with an intrinsic value of $37,400, which represents the difference between the Company’s closing stock price on the last day of trading of 2012 and the exercise price multiplied by the number of in-the-money options, assuming all option holders had exercised their stock options on the last day of trading for the same period. Stock option expense for the year ended December 31, 2012 was $12,000. There was no stock option expense for 2011 and 2010. There were no stock options exercised during the years ended December 31, 2012 and 2011.