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On May 19, 2009, the shareholders of the Company approved the Company’s Stock Incentive Plan (the “Plan”), which superseded and replaced the Omnibus Stock Ownership and Long Term Incentive Plan.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 Company’s Board of Directors approved the Plan, effective March 19, 2009, with a termination date of December 31, 2019. The Company’s Board of Directors 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 did not grant stock options during the three and nine months ended September 30, 2018 and 2017 and there were no options outstanding at September 30, 2018 and 2017.

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 recognized over the three-year period. The restricted shares issued to nonemployee directors are not subject to a vesting period; however, they are subject to certain restrictions for the three-year period. Compensation expense for nonemployee directors is recognized at the date the shares are granted.

The Company has granted 7,333 and 10,525 shares of non-vested restricted stock to certain officers and 4,194 and 5,139 shares of vested restricted stock to nonemployee directors during the nine months ended September 30, 2018 and 2017, respectively. Compensation expense, net of forfeitures, for non-vested shares was $34,000 and $(12,000) for the three months ended September 30, 2018 and 2017, and $99,000 and $53,000 for the nine months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, there was $217,000 and $166,000, respectively, of total unrecognized compensation expense related to these non-vested shares, which will be recorded in conjunction with the remaining vesting periods. There was no compensation expense for nonemployee directors for the three months ended September 30, 2018 and 2017. There was $90,000 of compensation expense for nonemployee director shares for the nine months ended September 30, 2018 and 2017.

A summary of the status of the Company’s non-vested restricted shares granted under the Plan is presented below:

	September 30, 2018					September 30, 2017
	Shares			Weighted Average Fair Value Per Share		Shares			Weighted Average Fair Value Per Share
Non-vested shares, beginning		18,062		$	16.44		18,045		$	15.04
Granted		11,527			21.47		15,664			17.50
Vested		(6,652	)		21.47		(9,123	)		16.74
Forfeited		(368	)		21.47		(6,524	)		16.24
Non-vested shares, ending		22,569		$	17.98		18,062		$	15.88

The Company granted 6,867 and 10,525 shares of performance-based stock rights with respect to certain officers during the nine months ended September 30, 2018 and 2017, respectively. The performance-based stock rights are accounted for using the fair market value of the Company’s common stock on the date awarded, and adjusted as the market value of the stock changes. The performance-based stock rights are subject to a vesting period, whereby the restrictions on the shares lapse on the third year anniversary of the date the shares were awarded. Until vesting, the shares are not issued and not included in shares outstanding. The awards are subject to the Company reaching a predetermined three-year performance average on the return on average equity ratio, compared to a predetermined peer group of banks. Compensation expense for performance-based stock rights totaled $27,000 and $(4,000) for the three months ended September 30, 2018 and 2017, respectively, and $67,000 and $37,000 for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018 and 2017, there was $183,000 and $77,000 of total unrecognized compensation expense, respectively, related to non-vested share-based compensation arrangements granted under the Plan.

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

	September 30, 2018					September 30, 2017
	Performance Based Stock Rights			Weighted Average Fair Value Per Share		Performance Based Stock Rights			Weighted Average Fair Value Per Share
Non-vested shares, beginning		18,062		$	16.44		18,045		$	15.72
Granted		6,867			21.47		10,525			17.50
Vested		-			-		-			-
Forfeited		(2,826	)		21.47		(10,508	)		16.05
Non-vested shares, ending		22,103		$	17.90		18,062		$	16.58