Note 10 – Stock-based Compensation

Stock Options and Restricted Stock

In 2008, the Board of Directors adopted and stockholders approved an Equity Incentive Plan (the "Plan") which was assumed by the Company in connection with the Conversion. The Plan permits the grant of restricted stock, restricted stock units, stock options, and stock appreciation rights. Under the Plan, 126,287 shares of common stock were approved for awards for stock options and stock appreciation rights and 50,514 shares of common stock were approved for awards for restricted stock and restricted stock units, in each case, as adjusted for the Conversion exchange ratio.

As of September 30, 2012, on an adjusted basis, awards for stock options totaling 125,051 shares and awards for restricted stock totaling 24,747 shares of Company common stock have been granted, net of any forfeitures, to participants in the Plan. During the three and nine month periods ended September 30, 2012, share-based compensation expense totaled $59,000 and $125,000, respectively. During the three and nine month periods ended September 30, 2011, share-based compensation expense totaled $33,000 and $99,000, respectively for both stock options and restricted stock. All of the awards vest in 20 percent annual increments commencing one year from the grant date. The options are exercisable for a period of 10 years from the date of grant, subject to vesting.

The following is a summary of the Company's stock option plan awards during the period ended September 30, 2012:

	Shares(1)			Weighted-Average Exercise Price(1)		Weighted-Average Remaining Contractual Term In Years		Aggregate Intrinsic Value
Outstanding at the beginning of the year		97,492		$	9.07		7.33	$	104,317
Granted		26,417			8.49		9.42
Exercised		-			-
Forfeited		(3	)		9.07		7.33
Expired		-			-
Outstanding at September 30, 2012		123,906		$	8.94		7.77	$	148,688
Exercisable		61,682		$	9.07		7.33	$	66,000
Expected to vest, assuming a 0% forfeiture rate over the vesting term		123,906		$	8.94		7.77	$	148,688

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(1)As stated in Note 2, all share and per share information in this report for periods prior to the Conversion has been revised to reflect the 0.87423 Conversion exchange ratio.

As of September 30, 2012, there was $195,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plan. The cost is expected to be recognized over the remaining weighted-average vesting period of 2.64 years.

The fair value of each option award is estimated on the date of grant using a Black-Scholes model that uses the assumptions noted in the table below. The dividend yield is based on the current quarterly dividend in effect at the time of the grant.

The Company (including the predecessor entity) became a publicly held company in January 2008, so the amount of historical stock price information available is limited. As a result, the Company elected to use a weighted-average of its peers' historical stock prices, as well as the Company's own historical stock prices to estimate volatility. The Company bases the risk-free interest rate on the U.S. Treasury Constant Maturity Indices in effect on the date of the grant. The Company elected to use the Staff Accounting Bulletin No. 110, "Share-Based Payments" permitted by the Securities and Exchange Commission to calculate the expected term. This simplified method uses the vesting term of an option along with the contractual term, setting the expected life at a midpoint in between.

The fair value of options granted during 2012 were determined using the following weighted-average assumptions as of the grant date.

Annual dividend yield		0.00	%
Expected volatility		28.97	%
Risk-free interest rate		1.46	%
Expected term	7.5 years
Weighted-average grant date fair value per option granted	$	8.49

The fair value of the restricted stock awards is equal to the fair value of the Company's stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. Shares awarded as restricted stock vest ratably over a five-year period beginning at the grant date with 20% vesting on the anniversary date of each grant date.

The following is a summary of the Company's unvested restricted stock awards for the nine month period ended September 30, 2012:

Non-vested Shares	Shares(1)			Weighted-Average Grant-Date Fair Value Per Share(1)		Aggregate Intrinsic Value Per Share

Non-vested at January 1, 2012		22,706		$	6.43
Granted		9,617			6.49
Vested		(7,566	)		6.43
Forfeited		(10	)		-
Expired		-			-
Non-vested at September 30, 2012		24,747		$	6.45	$	10.14

Expected to vest assuming a 0% forfeiture rate over the vesting term		24,747		$	6.45	$	10.14

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(1)As stated in Note 2, all share and per share information in this report for periods prior to the Conversion has been revised to reflect the 0.87423 Conversion exchange ratio.

The aggregate intrinsic value of the unvested restricted stock awards as of September 30, 2012 was $251,000.

As of September 30, 2012, there was $193,000 of unrecognized compensation cost related to unvested restricted stock awards granted under the Plan remaining. The cost is expected to be recognized over the weighted-average vesting period of 2.45 years.

Employee Stock Ownership Plan

In January 2008, the ESOP borrowed $1.2 million from the Company to purchase common stock of the Company.

In August 2012, in conjunction with the Conversion, the ESOP borrowed $1.1 million from the Company to purchase common stock of the Company. Both loans are being repaid principally by the Bank through contributions to the ESOP over a period of ten years. The interest rate on the loans are fixed at 4.0% and 2.5% per annum, respectively. As of September 30, 2012, the remaining balance of the ESOP loans were $751,000 and $1.1 million.

Neither the loan balances nor the related interest expense are reflected on the condensed consolidated financial statements.

At September 30, 2012, the ESOP was committed to release 19,553 shares of the Company's common stock to participants and held 194,221 unallocated shares remaining to be released in future years. The fair value of the 194,221 restricted shares held by the ESOP trust was $2.0 million at September 30, 2012. ESOP compensation expense included in salaries and benefits was $61,000 and $114,000 for the three and nine month periods ended September 30, 2012.