Note 10. Stock Incentive Plans

The Company maintains two shareholder-approved Company Stock Incentive Plans providing for the grant of equity based incentive compensation to essentially all employees. The 1995 Plan authorized grants of up to 1,440,000 shares of common stock over a ten-year period beginning in 1996. The term of the 1995 Plan expired in February of 2006. The 2005 Plan authorizes grants of up to 1,440,000 shares over a ten-year period beginning in 2005. Under both Plans, grants may take the form of stock awards, awards of options to acquire stock, stock appreciation rights, and other forms of equity based compensation. Prior to 2007, most awards were granted in the form of options to acquire stock; since 2007, both options to acquire stock and stock awards were granted. The option price for all grants has been the current market price at the time of the grant.

Option Awards

During 2011 and 2010, the Company granted stock options to certain management employees. These grants consisted of incentive and non-qualified stock options, vesting 25% annually on the first through fourth anniversaries of the grant date, and having a maximum ten year life. During 2009, the Company granted stock options to all employees with more than one year of service at the date of grant. This grant consisted of incentive and non-qualified stock options, vesting 20% annually on the first through fifth anniversaries of the grant date, and having a maximum seven year life.

The fair values of these grants were estimated at the respective grant dates using a Black-Scholes option-pricing model with the following assumptions:

	2011			2010			2009
Dividend rate		1.99	%		1.90	%		1.09	%
Risk-free interest rate		2.73	%		2.45	%		1.88	%
Expected lives of options	6.25 years			6.25 years			5 years
Price volatility		38.45	%		39.48	%		40.87	%

Volatility is based on the historical volatility of the price of the Company's stock over the expected term of the options. The expected term represents the period of time that the options granted are expected to be outstanding. The risk free rate is based on the U.S. Treasury yield curve, in effect at the date the fair value of the options is calculated, with an equivalent term.

Management has made an estimate of expected forfeitures and recognizes compensation costs only for those awards expected to vest. Compensation cost recognized in 2011, 2010 and 2009 totaled $601 thousand, $501 thousand and $555 thousand, respectively, and the income tax benefit for option-based compensation arrangements recognized in 2011, 2010 and 2009 was $80 thousand, $35 thousand and $26 thousand, respectively.

A summary of outstanding options at December 31, 2011, 2010 and 2009 and changes during the years ended on those dates is as follows:

	Options			Weighted Average Grant Price Per Option		Fair Value Per Option

Outstanding December 31, 2008		224,925		$	12.20

Granted		169,047			25.26	$	8.73
Cancelled		(9,780	)		25.26
Exercised		(45,710	)		8.92
Outstanding December 31, 2009		338,482			18.79

Granted		69,222			16.50	$	5.70
Cancelled		(7,381	)		25.26
Exercised		(59,215	)		10.10
Outstanding December 31, 2010		341,108			19.69

Granted		81,343			16.58	$	5.62
Cancelled		(10,557	)		21.87
Exercised		(5,000	)		7.34
Outstanding December 31, 2011		406,894		$	19.16

There were options for 406,894 shares outstanding at December 31, 2011 at a weighted average exercise price of $19.16 per share, an aggregate intrinsic value of $0.2 million and a weighted-average remaining contractual life of 5.4 years. There were options for 152,560 shares exercisable at December 31, 2011 at a weighted average exercise price of $17.24 per share, an aggregate intrinsic value of $0.2 million and a weighted-average remaining contractual life of 3.6 years. The aggregate intrinsic value represents the total pretax intrinsic value of in-the-money options, based on the Company's closing stock price of $10.48 as of December 31, 2011.

During 2011, the total fair value of options vested was $0.5 million; the total intrinsic value of options exercised was $16 thousand. The total cash received as a result of employee stock option exercises was $37 thousand. No actual tax benefit was realized for this exercise.

As of December 31, 2011, the total compensation cost related to non-vested options not yet recognized is $0.7 million which will be recognized over a weighted-average period of 2.6 years.

Stock Awards

In September 2007, the Company granted 68,130 performance shares to all members of the Board of Directors and essentially all employees during 2007. Directors and senior management in the aggregate were granted 23,404 performance shares (“management shares”); all other employees in the aggregate were granted 44,726 performance shares (“employee shares”). Management shares can vest at the fifth, sixth, seventh or eighth anniversary of the grant date if, for the thirty day period ending on the day prior to the respective anniversary date, the average closing price of a share of the Company's common stock exceeds a defined target price. The target price for each anniversary date is equal to the grant date market price ($20.50 per share) plus $1.64 for each year since the grant date. Except for normal retirement, shares will vest only if the target price is achieved and the recipient has remained employed through the anniversary date that the target price is achieved on. Employee shares can vest at the fourth or fifth anniversary of the grant date on otherwise similar terms.

Due to the market condition of achieving a target stock price in order to vest, the Company determined the grant date fair value of the performance shares, as well as the expected term of the awards, using a Monte Carlo simulation. The following assumptions were used in deriving the grant date fair value and expected term:

	Management Shares			Employee Shares
Assumptions:
Dividend rate		1.5	%		1.5	%
Risk free rate		4.44	%		4.38	%
Annual price volatility		34	%		34	%

Derived values:
Fair value per share	$	13.20		$	12.20
Expected term (years)		5.81			5.38

The Company estimated expected forfeitures of 40% for management shares and 35% for employee shares. Through December 31, 2007, 1,324 employee shares were forfeited due to employees' termination of employment; an additional 6,573 employee shares and 1,992 management shares were forfeited during the year ended December 31, 2008; and 1,544 employee shares and 751 management shares were forfeited during the year ended December 31, 2009. During 2010, an additional 2,531 employee shares were forfeited; no management shares were forfeited during 2010. During 2011, an additional 2,560 employee shares were forfeited; no management shares were forfeited during 2011. During 2011, the Company revised its estimate of management share forfeitures to 15%, adding $48 thousand to recorded compensation expense.

In June 2010, the Company made grants of non-vested shares to 16 management employees. The Company granted 34,142 shares. The shares vest 25% annually. The award was valued at the market price of the Company's common stock on the date of grant ($16.50 per share). Subsequently, one recipient surrendered 730 shares upon termination of employment in 2010, and an additional 1,270 shares were surrendered in 2011. The Company also made a grant of non-vested shares to the non-employee members of the Company's Board of Directors. The Company granted 7,272 shares, valued at the market price of the Company's common stock on the grant date ($16.50 per share). The shares vest 33% annually. During 2011, 8,348 shares and 2,424 shares were vested and distributed from these grants to management employees and non-employee members of the Board of Directors, respectively.

In February 2011, the Company made grants of non-vested shares to 18 management employees. The Company granted 54,075 shares. The shares vest 25% annually. The award was valued at the market price of the Company's common stock on the date of grant ($16.58 per share). Subsequently, one recipient surrendered 2,453 shares upon termination of employment. The Company also made a grant of non-vested shares to the non-employee members of the Company's Board of Directors. The Company granted 8,448 shares, valued at the market price of the Company's common stock on the grant date ($16.58 per share). The shares vest 33% annually.

In April 2011, the Company made grants of non-vested shares to selected other employees. The Company granted 16,184 shares, of which 8,159 were vested and distributed immediately. The remaining shares vest in various schedules over the next four years. The award was valued at the market price of the Company's common stock on the date of grant ($18.06 per share). Subsequently, 450 unvested shares were surrendered upon termination of employment.

The following table recaps the share grant activity described above:

	Shares

Outstanding December 31, 2008		58,241

Granted		-
Cancelled		(2,295	)
Vested and issued		-
Outstanding December 31, 2009		55,946

Granted		41,415
Cancelled		(3,261	)
Vested and issued		-
Outstanding December 31, 2010		94,100

Granted		78,707
Cancelled		(6,733	)
Vested and issued		(18,931	)
Outstanding December 31, 2011		147,143

Compensation cost recognized for share awards during 2011, 2010 and 2009, was $1.1 million, $0.3 million and $0.1 million, respectively. The income tax benefit for share-based compensation arrangements was $0.4 million, $0.1 million, and $39 thousand for 2011, 2010 and 2009.