Note 7.

Stock Based Compensation

Stock Incentive Plan

On May 19, 2009, the shareholders of the Company approved the Company's Stock Incentive Plan (the “Plan”), which superseded and replaced the Omnibus Stock Ownership and Long Term Incentive Plan.

Under the Plan, stock options, stock appreciation rights, non-vested and/or restricted shares, and long-term performance unit awards may be granted to directors and certain employees for purchase of the Company's common stock. The effective date of the Plan is March 19, 2009, the date the Company's Board approved the Plan, and it has a termination date of December 31, 2019. The Company's Board may terminate, suspend or modify the Plan within certain restrictions. The Plan authorizes for issuance 350,000 shares of the Company's common stock. The Plan requires that options be granted at an exercise price equal to at least 100% of the fair market value of the common stock on the date of the grant. Such options are generally not exercisable until three years from the date of issuance and generally require continuous employment during the period prior to exercise. The options will expire in no more than ten years after the date of grant. The stock options, stock appreciation rights, restricted shares, and long-term performance unit awards for certain employees are generally subject to vesting requirements and are subject to forfeiture if vesting and other contractual provision requirements are not met.

The Company previously issued stock options to non-employee directors under its Non-employee Director Stock Option Plan, which expired in 1999. Under that plan, each non-employee director of the Company or its subsidiary received an option grant covering 2,240 shares of Company common stock on April 1 of each year during the five-year term of the plan. The first grant under the plan was made on May 1, 1995. The exercise price of awards was fixed at the fair market value of the shares on the date the option was granted. During the term of the plan, options for a total of 120,960 shares of common stock were granted. Effective January 1, 2000, the Omnibus Stock Ownership and Long-Term Incentive Plan for employees was amended and restated to include non-employee directors. The Company did not grant stock options during the nine months ended September 30, 2011 or September 30, 2010.

Restricted Shares

The restricted shares are accounted for using the fair market value of the Company's common stock on the date the restricted shares were awarded. The restricted shares issued to certain officers are subject to a vesting period, whereby, the restrictions on the shares lapse on the third year anniversary of the date the restricted shares were awarded. Compensation expense for these shares is accrued over the three year period.

The Company has granted awards of non-vested shares to certain officers and vested shares (effective March 31, 2010) to non-employee directors under the above-described incentive plans: 9,714 shares and 9,784 shares of unvested restricted stock to executive officers and 4,752 shares and 5,553 shares of vested restricted stock to non-employee directors on February 17, 2011 and March 5, 2010, respectively. Compensation expense for these non-vested shares amounted to $34,000 and $38,000, net of forfeiture, for the three months ended September 30, 2011 and 2010, respectively. For the nine months ended September 30, 2011 and 2010, compensation expense for these non-vested shares, net of forfeiture, amounted to $102,000 and $112,000, respectively. During the quarter ended March 31, 2010, the restricted shares previously issued to non-employee directors were no longer subject to a vesting period, and the previously deferred compensation expense on these shares, totaling an additional compensation expense of $169,000, was fully recognized during the first quarter of 2010. Beginning in 2011, compensation expense for the non-employee director shares is recognized at the date the shares are granted. During the quarter ended September 30, 2011, there was no compensation expense for non-employee director shares.

The Company granted 9,714 and 9,784 of performance-based stock rights to certain officers on February 17, 2011 and March 5, 2010, respectively, under the Plan.

The performance-based stock rights are accounted for using the fair market value of the Company's common stock on the date the restricted shares were awarded, and adjusted as the market value of the stock changes. The performance-based stock rights shares issued to executive officers are subject to a vesting period, whereby the restrictions on the shares lapse on the third year anniversary of the date the restricted shares were awarded. The award for 2010 is subject to the Company reaching a predetermined return on average equity ratio for the final year of the vesting period. The award for 2011 is subject to the Company reaching a predetermined three year performance average on the return on average equity ratio as compared to a predetermined peer group of banks. Compensation expense for performance-based stock rights amounted to $22,000 and $11,000 in the quarters ended September 30, 2011, and 2010, respectively. Compensation expense for performance-based stock rights amounted to $85,000 and $79,000 in the nine months ended September 30, 2011, and 2010, respectively.

A summary of the status of options granted under the Plans is presented below:

	Nine Months Ended September 30, 2011
	Number of Shares			Weighted Average Exercise Price		Average Intrinsic Value (1)

Outstanding at January 1, 2011		42,266		$	10.84

Granted		-
Exercised		(18,534	)		8.07
Forfeited		-
Outstanding at September 30, 2011		23,732		$	13.00

Exercisable at end of quarter		23,732				$	(38,446	)
Weighted-average fair value per option of options granted during the year		-

(1) The aggregate intrinsic value of stock options in the table above reflects the pre-tax intrinsic value (the amount by which the September 30, 2011 market value of the underlying stock option exceeded the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on September 30, 2011. This amount changes based on the changes in the market value of the Company's common stock.

The total intrinsic value of options exercised during the nine months ended September 30, 2011 and 2010 was $97,303 and $161,271, respectively.

A summary of the status of the Company's non-vested restricted shares granted under the above-described plans is presented below:

	Nine Months Ended September 30, 2011
	Shares			Weighted Average Grant Date Fair Value

Nonvested at January 1, 2011		33,772		$	13.61

Granted		14,466			14.30
Vested		(15,666	)		16.67
Forfeited		-			-
Nonvested at September 30, 2011		32,572		$	12.44

As of September 30, 2011, there was $186,322 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. This type of deferred compensation cost is recognized over a period of three years.

A summary of the status of the Company's non-vested performance-based stock rights is presented below:

	Nine Months Ended September 30, 2011
	Performance Based Stock Rights		Weighted Average Fair Value

Nonvested at January 1, 2011		22,858	$	11.65

Granted		9,714		14.30
Vested		-		-
Forfeited		-		-
September 30, 2011		32,572	$	12.44

The Company also maintains a Director Deferred Compensation Plan (“Deferred Compensation Plan"). This plan provides that any non-employee director of the Company or the Bank may elect to defer receipt of all or any portion of his or her compensation as a director. A participating director may elect to have amounts deferred under the Deferred Compensation Plan held in a deferred cash account, which is credited on a quarterly basis with interest equal to the highest rate offered by the Bank at the end of the preceding quarter. Alternatively, a participant may elect to have a deferred stock account in which deferred amounts are treated as if invested in the Company's common stock at the fair market value on the date of deferral. The value of a stock account will increase and decrease based upon the fair market value of an equivalent number of shares of common stock. In addition, the deferred amounts deemed invested in common stock will be credited with dividends on an equivalent number of shares. Amounts considered invested in the Company's common stock are paid, at the election of the director, either in cash or in whole shares of the common stock and cash in lieu of fractional shares. Directors may elect to receive amounts contributed to their respective accounts in one or up to five installments.

The Company has a nonqualified deferred compensation plan for a former key employee's retirement, in which the contribution expense is solely funded by the Company. The retirement benefit to be provided is variable based upon the performance of underlying life insurance policy assets. Deferred compensation expense amounted to $8,322 and $1,383 for the quarters ended September 30, 2011 and 2010, and $9,507 and $4,149 for the nine months ending September 30, 2011 and 2010, respectively.

Concurrent with the establishment of the Deferred Compensation Plan, the Company purchased life insurance policies on this employee with the Company named as owner and beneficiary. These life insurance policies are intended to be utilized as a source of funding the Deferred Compensation Plan. The Company has recorded in other assets of $1,137,430 and $1,112,442 representing cash surrender value of these policies at September 30, 2011 and December 31, 2010, respectively.