Stock-Based Compensation and Shareholders' Equity

6 Months Ended

Jun. 30, 2011

Stock-Based Compensation and Shareholders' Equity

STOCK-BASED COMPENSATION AND SHAREHOLDERS' EQUITY

3. STOCK-BASED COMPENSATION AND SHAREHOLDERS' EQUITY

QNB sponsors stock-based compensation plans, administered by a committee, under which both qualified and non-qualified stock options may be granted periodically to certain employees. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.

Stock-based compensation expense was approximately $17,000 and $15,000 for the three months ended June 30, 2011 and 2010, respectively, and $29,000 and $25,000 for the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011, there was approximately $82,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 30 months.

Options are granted to certain employees at prices equal to the market value of the stock on the date the options are granted. The 1998 Plan authorized the issuance of 220,500 shares. The time period during which any option is exercisable under the Plan is determined by the committee but shall not commence before the expiration of six months after the date of grant or continue beyond the expiration of ten years after the date the option is awarded. The granted options vest ratably over a three-year period. As of June 30, 2011, there were 225,058 options granted, 28,444 options forfeited, 114,414 options exercised and 82,200 options outstanding under this Plan. The 1998 Plan expired on March 10, 2008, therefore no further options can be granted under this Plan.

The 2005 Plan authorizes the issuance of 200,000 shares. The terms of the 2005 Plan are identical to the 1998 Plan, except options expire five years after the grant date. As of June 30, 2011, there were 100,700 options granted, 29,125 options forfeited and 71,575 options outstanding under this Plan. The 2005 Plan expires March 15, 2015.

The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. QNB estimated the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of numerous assumptions, many of which are highly subjective in nature.

The following assumptions were used in the option pricing model in determining the fair value of options granted during the six months ended June 30:

Options granted	2011			2010
Risk-free interest rate		1.96	%		2.32	%
Dividend yield		5.02			5.28
Volatility		29.83			27.50
Expected life (years)		5.00			5.00

The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued. Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and expected lives of the options.

The fair market value of options granted in the first six months of 2011 and 2010 was $3.24 and $2.50, respectively.

Stock option activity during the six months ended June 30, 2011 is as follows:

						Weighted
						average
				Weighted		remaining		Aggregate
	Number			average		contractual		intrinsic
	of options			exercise price		term (in yrs.)		value
Outstanding at January 1, 2011		170,515		$	21.60
Exercised		(18,940	)		14.12
Forfeited		(14,800	)		26.00
Granted		17,000			20.00
Outstanding at June 30, 2011		153,775		$	21.92	2.3	$	484
Exercisable at June 30, 2011		105,725		$	23.55	2.0	$	260