Note 6. Stock Based Compensation

The Company recorded stock based compensation expense of $75 thousand and $68 thousand for the years to date June 30, 2016 and 2015, respectively.

The Company has a 2005 Stock Option Plan (the Plan) pursuant to which the Board of Directors may grant stock options to directors, officers and employees. Under the fair value recognition provisions of relevant accounting guidance, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.

The Company uses the Black-Scholes option pricing model to determine the fair value of stock options. The fair value of the stock based payment awards is affected by the price of our stock and a number of financial assumptions and variables. These variables include the risk free interest rate, expected dividend rate, expected stock price volatility and the expected life of the options. On December 18, 2014, the Board of Directors granted 165 thousand shares which will vest over a five year period. Financial assumptions and variables used to determine the fair value of these stock options are; risk free interest rate of 2.01%, an expected term of 7.5 years, an expected stock price volatility of 26% and a dividend rate of 0%. The fair value of the options was determined to be $2.29 per option. Compensation expense will be charged to income ratably over the vesting period and was $40 thousand year to date June 30, 2016 and $38 thousand year to date June 30, 2015. As of June 30, 2016 there was $247 thousand of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost will be recognized over the next 3.50 years. No options were granted during the six months ended June 30, 2016. All previously issued options were fully vested at the end of 2012. At the discretion of the Board of Directors, the stock option plan was not modified for the 4% stock dividend distributed on July 11, 2016.

A summary of option activity under the 2005 stock option plan year to date June 30, 2016 is as follows:

	Options Outstanding			Weighted Average Exercise Price		Aggregate Intrinsic Value (1)		Weighted Average Contractual Term (years)
Balance at December 31, 2015		546,460		$	8.62
Granted		–			–
Exercised		–			–
Expired		(333,960	)		9.09
Forfeited		(6,000	)		6.90
Balance at June 30, 2016		206,500		$	7.90	$	406,630		6.84
Exercisable at June 30, 2016		82,100		$	9.41	$	84,434		4.36

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on June 30, 2016.

In 2009, the Board of Directors authorized 132,000 shares of common stock for issuance under the Restricted Stock Plan. The plan provides for restricted stock awards to key employees. Restricted shares awarded to employees generally vest over a five year period and compensation expense is charged to income ratably over the vesting period and was $35 thousand and $30 thousand for the years to date June 30, 2016 and 2015, respectively. Compensation is accounted for using the fair market value of the Company’s common stock on the date the restricted shares are awarded. The Company granted 10,723 and 8,670 shares of restricted stock under the plan during the years to date June 30, 2016 and 2015, respectively. The weighted-average grant date fair value of restricted stock granted in 2016 was $9.45 compared to $7.70 in 2015.

As of June 30, 2016, there was $202 thousand of total unrecognized compensation cost related to restricted stock granted under the Plan. The cost is expected to be recognized through 2021. A summary of the activity for restricted stock awards for the periods indicated is presented below:

	For the six months ended June 30, 2016					For the six months ended June 30, 2015
	Shares			Weighted- Average Grant Date Fair Value		Shares			Weighted- Average Grant Date Fair Value
Nonvested at beginning of year		37,848		$	6.24		37,727		$	5.56
Granted		10,723			9.45		8,670			7.70
Vested		(10,938	)		5.65		(10,848	)		5.56
Forfeited		(6,529	)		7.27		–			–
Nonvested at the end of the period		31,104		$	7.34		35,549		$	6.08

The Restricted Stock Plan provides for the adjustment of the total number of shares reserved for issuance under the plan and the number of shares covered by each outstanding Award for stock dividends and stock splits. On July 11, 2016, a 4% stock dividend was distributed and added 5,280 to the total number of shares authorized for issuance and currently raising the total available to 137,280. The 4% stock dividend increases the nonvested number of shares by 1,238 shares to a total nonvested of 32,342 as of July 11, 2016.