Note 10. Stock Incentive Plans

The Company maintained 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, and the last outstanding award of options was exercised in 2012. 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 2012, 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. Options granted prior to 2010 had various vesting schedules and maximum lives.

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

	2012	2011	2010
Dividend rate	3.05%	1.99%	1.90%
Risk-free interest rate	1.22%	2.73%	2.45%
Expected lives of options	6.25 years	6.25 years	6.25 years
Price volatility	38.80%	38.45%	39.48%

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 2012, 2011 and 2010 totaled $561 thousand, $601 thousand and $501 thousand, respectively, and the income tax benefit for option-based compensation arrangements recognized in 2012, 2011 and 2010 was $129 thousand, $80 thousand and $35 thousand, respectively.

A summary of outstanding options at December 31, 2012, 2011 and 2010, 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, 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

Granted		151,522			10.82	$	3.02
Cancelled		(8,728	)		25.26
Exercised		(55,000	)		7.34
Outstanding December 31, 2012		494,688		$	17.82

There were options for 494,688 shares outstanding at December 31, 2012 at a weighted average exercise price of $17.82 per share, an aggregate intrinsic value of $0.7 million and a weighted-average remaining contractual life of 6.3 years. There were options for 173,025 shares exercisable at December 31, 2012 at a weighted average exercise price of $21.72 per share, no aggregate intrinsic value and a weighted-average remaining contractual life of 4.9 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 $15.31 as of December 31, 2012.

During 2012, the total fair value of options vested was $0.6 million; the total intrinsic value of options exercised was $0.6 million. The total cash received as a result of employee stock option exercises was $0.4 million. The tax benefit realized for this exercise was $0.1 million.

As of December 31, 2012, the total compensation cost related to non-vested options not yet recognized is $0.5 million which will be recognized over a weighted-average period of 3.6 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 employees who reach normal retirement age, 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 could vest at the fourth, fifth or sixth anniversary of the grant date on otherwise similar terms. No shares have vested under these awards.

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. 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 34,142 non-vested shares to 16 management employees. 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). The Company also made a grant of 7,272 non-vested shares to the non-employee members of the Company's Board of Directors, valued at the market price of the Company's common stock on the grant date ($16.50 per share). The shares vest 33% annually.

In February 2011 and again in February 2012, the Company made grants of 54,075 and 66,384 non-vested shares to 17 and 18 management employees, respectively. The shares vest 25% annually. The awards were valued at the market price of the Company's common stock on the date of grant ($16.58 and $10.82 per share, respectively). The Company also made grants of non-vested shares to the non-employee members of the Company's Board of Directors. The Company granted 8,448 and 14,784 shares in 2011 and 2012, respectively, valued at the market price of the Company's common stock on the grant date ($16.58 and $10.82 per share, respectively). The shares vest 33% annually.

In April 2011 and again in May 2012, 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, in April 2011, and granted 38,186 shares, of which 14,040 were vested and distributed immediately, in May 2012. The remaining shares vest in various schedules over the next four years. The awards were valued at the market price of the Company's common stock on the date of grant ($18.06 and $10.51 per share in 2011 and 2012, respectively).

A summary of outstanding share grants at December 31, 2012, 2011, and 2010, and changes during the years ended on those dates, is as follows:

	Shares

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

Granted		119,354
Cancelled		(8,098	)
Vested and issued		(45,045	)
Outstanding December 31, 2012		213,354

Compensation cost recognized for share awards during 2012, 2011 and 2010, was $1.3 million, $1.1 million and $0.3 million, respectively. The income tax benefit for share-based compensation arrangements was $0.3 million, $0.4 million, and $0.1 million for 2012, 2011 and 2010.

As of December 31, 2012, the total compensation cost related to non-vested share awards not yet recognized is $1.0 million which will be recognized over a weighted-average period of 2.0 years.