STOCK BASED COMPENSATION

The Company has the following stock based plans, all of which have been approved by the Company’s Board of Directors and shareholders:


•	1996 Nonemployee Directors’ Stock Option Plan (“1996 Plan”)


•	1997 Employee Stock Option Plan (“1997 Plan”)


•	2005 Amended and Restated Employee Stock Plan (“2005 Plan”)


•	2006 Nonemployee Director Stock Plan (“2006 Plan”)


•	2010 Nonemployee Director Stock Plan (“2010 Plan”)

The following table presents the amount of cumulatively granted stock options and restricted stock awards, net of forfeitures, through December 31, 2012:



	Authorized Stock Option Awards	Authorized Restricted Stock Awards	Total	Cumulative Granted, Net of Forfeitures		Total	Authorized but Unissued
				Stock Option Awards	Restricted Stock Awards
				Stock Option Awards	Restricted Stock Awards
1996 Plan	300,000	N/A	300,000	191,000	N/A	191,000	(4)
1997 Plan	1,100,000	N/A	1,100,000	972,771	N/A	972,771	(4)
2005 Plan	(1)	(1)	1,650,000	424,899	373,156	798,055	851,945
2006 Plan	(2)	(2)	35,400	15,000	20,400	35,400	(4)
2010 Plan	(3)	(3)	314,600	22,000	41,600	63,600	251,000


(1)	The Company may award up to a total of 1,650,000 shares as stock options or restricted stock awards.


(2)	The Company may award up to a total of 50,000 shares as stock options or restricted stock awards. During 2010, the remaining 14,600 shares were transferred and available for issue under the 2010 Plan.


(3)	The Company may award up to a total of 314,600 shares as stock options or restricted stock awards, inclusive of 14,600 shares which were transferred from the 2006 Plan.


(4)	There are no shares available for grant under the 1996 Plan or 1997 Plan due to their expirations. These Plans have outstanding stock options exercisable despite the Plan expiration. Additionally, the 2006 Plan has outstanding stock options exercisable despite the transfer of remaining authorized shares to the 2010 Plan.

The Company issues shares for stock option exercises and restricted stock awards from its pool of authorized but unissued shares.

The following table presents the pre-tax expense associated with stock option and restricted stock awards and the related tax benefits recognized for the years presented:



	Years Ended December 31
	2012		2011		2010
	(Dollars in thousands)
Stock based compensation expense
Stock options	$	526	$	662	$	436
Restricted stock awards(1)	1,968		1,502		1,018
Directors’ fee expense
Stock options	19		65		63
Restricted stock awards	332		254		149
Total stock based award expense	$	2,845	$	2,483	$	1,666
Related tax benefits recognized in earnings	$	932	$	1,014	$	681


(1)	Inclusive of compensation expense associated with time-vested and performance-based restricted stock awards.

Amounts recognized related to awards issued to directors are recognized as directors’ fees within other noninterest expense.

The Company has standard form agreements used for stock option and restricted stock awards. The standard form agreements used for the Chief Executive Officer and all other Executive Officers have previously been disclosed in Securities and Exchange Commission filings and generally provide that: (1) any unvested options or unvested restricted stock vest upon a Change of Control; and, that (2) any stock options which vest pursuant to a Change of Control, which is an event described in Section 280G of the Internal Revenue Code of 1986, will be cashed out at the difference between the acquisition price and the exercise price of the stock option.

Stock Options

There were no stock options granted in 2012. The following table provides vesting period and contractual term information for stock option awards issued for 2011 and 2010:



Date of Grant	Plan	Vesting Period From Date of Grant	Contractual Term
May 25, 2010	2010	20 months	10 years
February 10, 2011	2005	3 years	10 years
February 17, 2011	2005	3 years	10 years
May 24, 2011	2010	20 months	10 years

Under all of the Company’s stock based plans, the option exercise price is based upon the average of the high and low trading value of the stock on the date of grant. Stock option awards granted to date under all plans expire through 2021.

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions used for grants under the identified plans:


•	Expected volatility is based on the standard deviation of the historical volatility of the weekly adjusted closing price of the Company’s shares for a period equivalent to the expected life of the option.


•	Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term, historical exercise/forfeiture behavior, and the vesting period, if any.


•	Expected dividend yield is an annualized rate calculated using the most recent dividend payment at time of grant and the Company’s average trailing twelve-month daily closing stock price.


•	The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.

•

The stock based compensation expense recognized in earnings should be based on the amount of awards ultimately expected to vest, therefore a forfeiture assumption is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock based compensation expense recognized in 2012, 2011, and 2010 has been reduced for annualized estimated forfeitures of 3.5%, 5%, and 5%, respectively, based on historical experience.

During the year ended December 31, 2012, the Company did not issue stock options. During the years ended December 31, 2011 and 2010, the Company has made the following awards of nonqualified options to purchase shares of common stock:



	Years Ended December 31
	2011			2010
Date of grant	2/10/2011	2/17/2011	5/24/2011	5/25/2010
Plan	2005	2005	2010	2010
Options granted	40,000	54,000	7,000	15,000
Vesting period (1)	3 years	3 years	20 months	3 years
Expiration date	2/10/2021	2/17/2021	5/24/2021	5/25/2020
Expected volatility	32%	32%	33%	39%
Expected life (years)	5.5	5	5	5
Expected dividend yield	2.90%	2.89%	2.87%	3.18%
Risk free interest rate	2.57%	2.27%	1.81%	2.01%
Fair value	$6.81	$6.39	$6.72	$6.31


(1)	Vesting periods begin on the grant date unless otherwise noted.

The following table presents relevant information relating to the Company’s stock options for the periods indicated:



	Years Ended December 31
	2012		2011		2010
	(Dollars in thousands)
Fair value of stock options vested based on grant date fair value	$	706	$	506	$	460
Intrinsic value of stock options exercised/forfeited	$	627	$	943	$	406
Cash received from stock option exercises	$	1,242	$	4,127	$	743
Tax benefit realized on stock option exercises/repurchase	$	242	$	735	$	91
Weighted average grant date fair value of options granted (per share)	$	—	$	6.58	$	6.31
Cash paid to settle equity instruments granted under stock based compensation arrangements	$	134	$	—	$	—

A summary of the status of the Company’s Stock Option Grants for the year ended December 31, 2012 is presented in the table below:



	Outstanding								Nonvested
	Stock Option Awards			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (1)		Stock Option Awards			Weighted Average Grant Date Fair Value
	(Dollars in thousands, except per share data)
Balance at January 1, 2012	976,066			$	29.18				203,220			$	6.64
Granted	—			$	—				—			$	—
Exercised/repurchased	(251,425	)		$	26.56				n/a			n/a
Vested	n/a			n/a					(99,703	)		$	7.09
Forfeited	(4,333	)		$	24.08				(4,333	)		$	5.82
Expired	(36,067	)		$	30.04				—			$	—
Balance at December 31, 2012	684,241		(2)	$	30.13	4.00	$	422	99,184		(4)	$	6.23
Options outstanding and expected to vest at December 31, 2012	682,737		(2)	$	30.14	3.99	$	420
Options exercisable at December 31, 2012	585,057		(3)	$	30.52	3.48	$	329
Unrecognized compensation cost, including forfeiture estimate														$	275
Weighted average remaining recognition period (years)														0.97


(1)	The aggregate intrinsic value in the preceding tables represents the total pre-tax intrinsic value, based on the average of the high price and low price at which the Company’s common stock traded on December 31, 2012 of $28.73 which would have been received by the option holders had they all exercised their options as of that date.


(2)	Inclusive of 58,000 stock options outstanding and expected to vest to Directors.


(3)	Inclusive of 55,842 vested stock options outstanding to Directors.


(4)	Inclusive of 2,158 nonvested stock options outstanding to Directors.

Restricted Stock

The Company grants both time-vested restricted stock awards as well as performance-based restricted stock awards. During the years ended December 31, 2012, 2011, and 2010 the Company has made the following restricted stock award grants:



	Shares Granted	Plan	Fair Value (1)	Vesting Period
Time-vested
2012
2/16/2012	89,800	2005	27.81	Ratably over 5 years from grant date
4/5/2012	1,000	2005	28.16	Ratably over 5 years from grant date
5/22/2012	1,000	2010	27.63	Immediate upon grant
5/22/2012	13,000	2010	27.63	At the end of 5 years from grant date(2)
11/10/2012	1,000	2010	28.03	At the end of 5 years from grant date(2)
2011
2/10/2011	27,750	2005	27.58	Ratably over 5 years from grant date
2/17/2011	33,000	2005	27.43	Ratably over 5 years from grant date
5/3/2011	3,000	2005	29.00	Ratably over 5 years from grant date
5/24/2011	9,800	2010	28.88	At the end of 5 years from grant date(2)
2010
2/11/2010	37,000	2005	23.39	Ratably over 3 years from grant date
2/25/2010	54,500	2005	25.12	Ratably over 3 years from grant date
5/25/2010	16,800	2010	23.07	At the end of 3 years from grant date(2)

Performance-based
2011
8/8/2011	3,637	2005	23.81	On December 31, 2014

(1)

The fair value of the restricted stock awards are based upon the average of the high and low price at which the Company’s common stock traded on the date of grant. The holders of time-vested restricted stock awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights. The holders of performance-based restricted stock awards do not participate in the rewards of stock ownership of the Company until vested. The holders of all restricted stock awards are not required to pay any consideration to the Company for the awards.

(2)

These restricted stock grants will vest at the end of a three or five year period, or earlier if the director ceases to be a director for any reason other than cause, such as, for example, by retirement. If a non-employee director is removed from the Board for cause, the Company has ninety (90) days within which to exercise a right to repurchase any unvested portion of any restricted stock award from the non-employee director for the aggregate price of one dollar ($1.00).

The following table presents the fair value of restricted stock awards vesting during the periods presented:



	Years Ended December 31
	2012		2011		2010
	(Dollars in thousands)
Fair value of restricted stock awards upon vest	$	2,085	$	1,599	$	623

A summary of the status of the Company’s Restricted Stock Award Grants for the year ended December 31, 2012 is presented in the table below:



	Outstanding Restricted Stock Awards			Weighted Average Grant Price ($)
	(Dollars in thousands, except per share data)
Balance at January 1, 2012	239,177			$	23.70
Granted	105,800			27.79
Vested/released	(74,350	)		23.54
Forfeited	(2,866	)		26.68
Expired	—			—
Balance at December 31, 2012	267,761		(1)	$	25.33
Unrecognized compensation cost (inclusive of directors’ fees), including forfeiture estimate						$	4,385
Weighted average remaining recognition period (years)						3.23


(1)	Inclusive of 62,000 restricted stock awards outstanding to Directors.