Note 6. Stock Compensation Plans

The Virginia National Bank 1998 Stock Incentive Plan ("1998 Plan"), 2003 Stock Incentive Plan ("2003 Plan"), and 2005 Stock Incentive Plan ("2005 Plan") provide for granting of both incentive and nonqualified stock options, as well as restricted stock and other stock based awards. The option price of incentive options will not be less than the fair market value of the stock at the time an option is granted. Nonqualified options may be granted at a price established by the Board of Directors, including prices less than the fair market value on the date of grant. Outstanding options generally expire in seven or ten years from the grant date. Stock options generally vest by the fourth or fifth anniversary of the date of the grant. No new grants will be issued under the 1998 Plan or the 2003 Plan as both plans have expired.

A summary of the shares issued and available under each Plan is shown below as of March 31, 2014:

	1998 Plan ⁽¹⁾		2003 Plan ⁽²⁾		2005 Plan ⁽³⁾
Aggregate shares issuable	430,100		128,369		230,000
Options issued, net of forfeited and
expired options	(381,089	)	(119,478	)	(153,776	)
Cancelled due to Plan expiration	(49,011	)	(8,891	)	-
Remaining available for grant	-		-		76,224

Grants issued and outstanding:
Total vested and unvested shares	7,216		45,088		152,383
Fully vested shares	7,216		43,650		141,907

Exercise price range	$18.61 to		$15.65 to		$11.74 to
	$23.30		$22.17		$36.74

(1)		At the Annual Meeting of Shareholders of Virginia National Bank, held on May 17, 1999, shareholders approved the 1998 Plan. No new grants can be issued under this plan, since the plan is expired.
(2)		At the Annual Meeting of Shareholders of Virginia National Bank, held on May 21, 2003, shareholders approved the 2003 Plan. No new grants can be issued under this plan, since the plan is expired.
(3)		At the Annual Meeting of Shareholders of Virginia National Bank, held on May 16, 2005, shareholders approved the Virginia National Bank 2005 Stock Incentive Plan, and the Amended and Restated 2005 Stock Incentive Plan (as amended, "2005 Plan") was approved by shareholders at the annual meeting held on May 15, 2006.

The Company accounts for all of its stock incentive plans under recognition and measurement accounting principles which require that the compensation cost relating to stock-based payment transactions be recognized in financial statements. Stock-based compensation arrangements include stock options and restricted stock. All stock-based payments to employees are required to be valued using a fair value method on the date of grant and expensed based on that fair value over the applicable vesting period. For the three months ended March 31, 2014 and 2013, the Company recognized $19,000 and $28,000, respectively, in compensation expense for stock options and restricted stock grants. As of March 31, 2014, there was $97,000 in unamortized compensation expense remaining to be recognized in future reporting periods through 2017.

Stock Options

Changes in the stock options outstanding related to the 1998 Plan, the 2003 Plan and the 2005 Plan are summarized as follows:

	March 31, 2014
(dollars in thousands, except per share data)			Weighted Average		Aggregate
	Number of Options		Exercise Price		Intrinsic Value
Outstanding at January 1, 2014	226,424		$	26.35	$	44
Granted	5,000			18.10
Exercised	-			-
Forfeited	(26,737	)		31.03
Outstanding at March 31, 2014	204,687		$	25.54	$	260
Options exercisable at March 31, 2014	192,772		$	26.10	$	193

The fair value of any grant is estimated at the grant date using the Black-Scholes pricing model. During both the first quarter of 2014 and 2013, there were stock option grants of 5,000 shares. The fair value on the grant issued in 2014 was estimated based on the assumptions noted in the following table:

	For the three months ended
	March 31, 2014
Expected volatility¹	29.20	%
Expected dividends²	1.10	%
Expected term (in years)³	6.25
Risk-free rate⁴	2.15	%

¹		Based on the monthly historical volatility of the Company's stock price over the expected life of the options.
²		Calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant.
³		Based on the average of the contractual life and vesting period for the respective option.
⁴		Based upon an interpolated US Treasury yield curve interest rate that corresponds to the contractual life of the option, in effect at the time of the grant.

Summary information pertaining to options outstanding at March 31, 2014 is as follows:

		Options Outstanding				Options Exercisable
			Weighted-	Weighted-			Weighted-
		Number of	Average	Average		Number of	Average
		Options	Remaining	Exercise		Options	Exercise
Exercise Price		Outstanding	Contractual Life	Price		Exercisable	Price
	$11.74 to 20.00	55,304	5.6 Years	$	17.39	43,390	$	17.65
	$20.01 to 30.00	76,818	3.3 Years		24.29	76,817		24.29
	$30.01 to 36.74	72,565	2.1 Years		33.07	72,565		33.07
	Total	204,687	3.5 Years	$	25.54	192,772	$	26.10

Restricted Stock

No restricted stock grants were awarded during 2013 or the first three months of 2014. Changes in the restricted stock activity as of March 31, 2014 are summarized as follows:

	March 31, 2014
(dollars in thousands, except per share data)						Weighted Average
	Number of	Grant Date		Aggregate		Remaining
	Shares	Fair Value		Intrinsic Value		Contractual Life
Outstanding at January 1, 2014	288	$	12.18
Issued	-		-
Vested	-		-
Non-vested at March 31, 2014	288	$	12.18	$	6	0.6 Years