Note 19—Share-Based Compensation

Compensation cost is recognized for stock options and restricted stock awards issued to employees. Compensation cost is measured as the fair value of these awards on their date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company's common stock at the date of grant is used as the fair value of restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the restriction period for restricted stock awards. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

The Company's 1999, 2004, and 2012 stock incentive programs are long-term retention programs intended to attract, retain, and provide incentives for key employees and non-employee directors in the form of incentive and non-qualified stock options and restricted stock.

Stock Options

With the exception of non-qualified stock options granted to directors under the 1999, 2004, and 2012 plans, which in some cases may be exercised at any time prior to expiration and in some other cases may be exercised at intervals less than a year following the grant date, incentive stock options granted under the plans may not be exercised in whole or in part within a year following the date of the grant, as these incentive stock options become exercisable in 25% increments pro ratably over the four-year period following the grant date. The options are granted at an exercise price at least equal to the fair value of the common stock at the date of grant and expire ten years from the date of grant. No options were granted under the 1999 plan after January 2, 2004, and the 1999 plan is closed other than for any options still unexercised and outstanding. No options were granted under the 2004 plan after January 26, 2012, and the 2004 plan is closed other than for any options still unexercised and outstanding. The 2012 plan is the only plan from which new share-based compensation grants may be issued. It is the Company's policy to grant options out of the 1,684,000 shares registered under the 2012 plan, of which no more than 817,476 shares can be granted as restricted stock.

Activity in the Company's stock option plans is summarized in the following table. All information has been retroactively adjusted for stock dividends and stock splits.

	2012					2011					2010

	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding at January 1		370,207		$	30.69		386,207		$	29.02		348,575		$	27.84
Granted		28,224			31.75		27,542			32.05		55,857			33.47
Exercised		(51,887	)		23.99		(43,533	)		16.79		(16,220	)		18.88
Forfeited		(6,150	)		31.80		(1	)		11.39		(2,005	)		28.79
Expired		(254	)		15.93		(8	)		15.64		—			—

Outstanding at December 31		340,140			31.79		370,207			30.69		386,207			29.02

Exercisable at December 31		267,941			31.73		285,987			30.38		289,469			27.93

Weighted-average fair value of options granted during the year				$	11.55				$	11.65				$	13.90

The aggregate intrinsic value of 340,140 and 370,207 stock options outstanding at December 31, 2012 and 2011 was $2.9 million and $448,000, respectively. The aggregate intrinsic value of 267,941 and 285,987 stock options exercisable at December 31, 2012 and 2011 was $2.3 million and $421,000, respectively.

Information pertaining to options outstanding at December 31, 2012, is as follows:

	Options Outstanding					Options Exercisable

Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life
$22.13 - $26.00		7,177	0.5 years	$	24.14		7,161	$	24.14
$26.01 - $31.00		89,738	3.2 years		27.50		82,032		27.50
$31.01 - $36.00		190,517	5.5 years		32.09		130,040		32.05
$36.01 - $40.99		52,708	4.7 years		39.02		48,708		39.13

		340,140	4.7 years		31.79		267,941		31.73	3.8 years

The fair value of options is estimated at the date of grant using the Black- Scholes option pricing model and expensed over the options' vesting periods. The following weighted-average assumptions were used in valuing options issued:

	2012	2011	2010

Dividend yield	2.10%	2.23%	2.05%
Expected life	6 years	5 years	6 years
Expected volatility	45.8% - 45.8%	43.8% - 49.7%	49.0% - 50.1%
Risk-free interest rate	1.06%	2.32%	2.73%

As of December 31, 2012, there was $524,000 of total unrecognized compensation cost related to non-vested stock option grants under the plans. The cost is expected to be recognized over a weighted-average period of 1.00 year as of December 31, 2012. The total fair value of shares vested during the years ended December 31, 2012, 2011 and 2010 was approximately $402,000, $458,000 and $332,000, respectively. Compensation expense of $382,000, $443,000, and $442,000 was recorded in 2012, 2011, and 2010, respectively.

Restricted Stock

The Company from time-to-time also grants shares of restricted stock to key employees and non-employee directors. These awards help align the interests of these employees and directors with the interests of the shareholders of the Company by providing economic value directly related to increases in the value of the Company's stock. The value of the stock awarded is established as the fair market value of the stock at the time of the grant. The Company recognizes expense, equal to the total value of such awards, ratably over the vesting period of the stock grants. Grants to employees typically cliff vest after four years. Grants to non-employee directors typically vest within a 12-month period.

All restricted stock agreements are conditioned upon continued employment. Termination of employment prior to a vesting date, as described below, would terminate any interest in non-vested shares. Prior to vesting of the shares, as long as employed by the Company, the key employees and non-employee directors will have the right to vote such shares and to receive dividends paid with respect to such shares. All restricted shares will fully vest in the event of change in control of the Company or upon the death of the recipient.

Non-vested restricted stock for the year ended December 31, 2012 is summarized in the following table. All information has been retroactively adjusted for stock dividends and stock splits.

Restricted Stock			Weighted- Average Grant-Date Fair Value

Nonvested at January 1	171,704		$	30.32
Granted	47,666			32.27
Vested	(41,530	)		30.22
Forfeited	(4,993	)		32.02

Nonvested at December 31	172,847			30.84

The Company granted 47,666, 57,639, and 23,562 shares for the years ended December 31, 2012, 2011, and 2010, respectively. The weighted-average- grant-date fair value of restricted shares granted in 2012, 2011, and 2010 was $32.27, $31.85, and $38.13, respectively. Compensation expense of $1.3 million, $1.3 million, and $1.2 million was recorded in 2012, 2011, and 2010, respectively.

The vesting schedule of these shares as of December 31, 2012 is as follows:

		Shares

2013			18,870
2014			17,166
2015			46,122
2016			44,483
2017			4,395
Thereafter			41,811

			172,847

As of December 31, 2012, there was $3.6 million of total unrecognized compensation cost related to non-vested restricted stock granted under the plans. The cost is expected to be recognized over a weighted-average period of 3.79 years as of December 31, 2012. The total fair value of shares vested during the years ended December 31, 2012, 2011 and 2010 was approximately $1.3 million, $1.3 million and $755,000, respectively.

Employee Stock Purchase Plan

The Company has registered 363,825 shares of common stock in connection with the establishment of an Employee Stock Purchase Plan. The plan, which expires June 30, 2017, is available to all employees who have attained age 21 and completed six months of service. The Company currently has more than 160,000 shares available for issuances under the plan. The price at which common stock may be purchased for each quarterly option period is the lesser of 95% of the common stock's fair value on either the first or last day of the quarter.

The 2002 Employee Stock Purchase Plan permits eligible employees to purchase Company stock at a discounted price. Beginning July 1, 2009, the 15% discount was reduced to 5%. The Company recognized $38,000, $37,000 and $35,000 in share-based compensation expense for the years ended December 31, 2012, 2011 and 2010, respectively.