Note 3. Stock-Based Compensation

The Corporation maintains two stock-based compensation plans from which new grants could be issued. The Corporation’s stock-based compensation plans permit Parent Corporation common stock to be issued to key employees and directors of the Corporation and its subsidiaries. The options granted under the plans are intended to be either incentive stock options or non-qualified options. Under the 2009 Equity Incentive Plan, a total of 363,081 shares are available for grant and issuance as of September 30, 2013. Under the 2003 Non-Employee Director Stock Option Plan, a total of 380,644 shares remain available for grant and issuance under the plan as of September 30, 2013. Such shares may be treasury shares, newly issued shares or a combination thereof.

Options have been granted to purchase common stock principally at the fair market value of the stock at the date of grant. Options are exercisable over a three year vesting period starting one year after the date of grant and generally expire ten years from the date of grant.

Stock-based compensation expense for share-based payment awards is based on the grant date fair value estimated on the date of grant. The Corporation recognizes compensation costs for those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of three years. The Corporation estimates the forfeiture rate based on its historical experience during the preceding seven fiscal years.

For the nine months ended September 30, 2013, the Corporation’s income before income taxes and net income were reduced by $54,000 and $32,000, respectively, as a result of the compensation expense related to stock options and restricted stock awards. For the nine months ended September 30, 2012, the Corporation’s income before income taxes and net income were reduced by $27,000 and $16,000, respectively, as a result of the compensation expense related to stock options.

Under the principal stock-based compensation plans, the Corporation may also grant stock awards to certain employees. Stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of any applicable restrictions. Unless fully vested at the time of grant, such awards generally vest within 30 days to five years from the date of grant. During that period, ownership of the shares cannot be transferred. Restricted stock and stock awards that are fully vested at the time of grant have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding. The Corporation expenses the cost of stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which any restrictions lapse.

There were 18,829 restricted stock awards outstanding at September 30, 2013 and none at September 30, 2012. These awards were issued with an award price equal to the market price of the Corporation’s common stock on the award date and with a five year vesting period. Forfeiture provisions exist for personnel that separate employment before vesting period expires. During the nine months of 2013, none of the shares of restricted stock were vested.

There were 41,639 and 27,784 shares of common stock underlying options that were granted during the nine months ended September 30, 2013 and 2012, respectively. The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values at the time the grants were awarded:

	Nine Months Ended
	September 30,
	2013			2012
Weighted average fair value of grants	$	3.34		$	2.03
Risk-free interest rate		1.97	%		2.03	%
Dividend yield		1.32	%		1.24	%
Expected volatility		25.84	%		22.04	%
Expected life in months		74			68

Activity under the stock-based compensation plans as of September 30, 2013 and changes during the nine months ended September 30, 2013 were as follows:

				Weighted-
		Weighted-		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
	Shares	Price		Term (Years)	Value
Outstanding at December 31, 2012	183,574	$	9.92
Granted – options	41,639		12.95
Exercised	(2,268)		9.14
Canceled/expired	(25,883)		10.88
Forfeited	(8,682)		10.58
Outstanding at September 30, 2013	188,380		10.55	6.25	$	705,001
Exercisable at September 30, 2013	119,827	$	10.06	4.74	$	510,991

The aggregate intrinsic value of options above represents the total pre-tax intrinsic value (the difference between the Corporation’s closing stock price on the last trading day of the third quarter of 2013 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2013. This amount changes based on the fair value of the Corporation’s stock.

As of September 30, 2013, there was approximately $161,000 of total unrecognized compensation expense relating to unvested stock options. These costs are expected to be recognized over a weighted average period of 3.02 years. As of September 30, 2013, there was approximately $231,000 of total unrecognized compensation expense relating to unvested restricted stock awards. These costs are expected to be recognized over a weighted average period of five years.