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, 2013:



	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	190,000	N/A	190,000	(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	537,941	465,856	1,003,797	646,203
2006 Plan	(2)	(2)	35,400	15,000	20,400	35,400	(4)
2010 Plan	(3)	(3)	314,600	27,000	56,300	83,300	231,300


(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
	2013		2012		2011
	(Dollars in thousands)
Stock based compensation expense
Stock options	$	241	$	526	$	662
Restricted stock awards(1)	1,906		1,968		1,502
Directors’ fee expense
Stock options	27		19		65
Restricted stock awards	289		332		254
Total stock based award expense	$	2,462	$	2,845	$	2,483
Related tax benefits recognized in earnings	$	832	$	932	$	1,014


(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

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 2013, 2012, and 2011 has been reduced for annualized estimated forfeitures of 3.5%, 3.5%, and 5.0%, respectively, based on historical experience.

The Company has made the following awards of nonqualified options to purchase shares of common stock from 2011 through 2013:



	Years Ended December 31
	2013			2011
Date of grant	11/9/2013			2/10/2011		2/17/2011		5/24/2011
Plan	2010			2005		2005		2010
Options granted	5,000			40,000		54,000		7,000
Vesting period (1)	13 months			3 years		3 years		20 months
Expiration date	11/9/2023			2/10/2021		2/17/2021		5/24/2021
Expected volatility	31.23		%	32.38%		32.11%		32.95%
Expected life (years)	5.5			5.5		5		5
Expected dividend yield	2.64		%	2.90%		2.89%		2.87%
Risk free interest rate	1.56		%	2.57%		2.27%		1.81%
Fair value per option	$	8.13		$	6.81	$	6.39	$	6.72


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

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 2023.

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



	Years Ended December 31
	2013		2012		2011
	(Dollars in thousands)
Fair value of stock options vested based on grant date fair value	$	430	$	706	$	506
Intrinsic value of stock options exercised	1,051		609		943
Cash received from stock option exercises	2,475		1,242		4,127
Tax benefit realized on stock option exercises/repurchase	322		242		735
Weighted average grant date fair value of options granted (per share)	8.13		—		6.58
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, 2013 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, 2013	684,241			$	30.13				99,184			$	6.23
Granted	5,000			35.48					5,000			8.13
Exercised	(152,793	)		28.94					n/a			n/a
Vested	n/a			n/a					(70,197	)		6.13
Forfeited	(500	)		27.58					(500	)		6.81
Expired	(11,000	)		31.15					—			—
Balance at December 31, 2013	524,948		(2)	$	30.50	3.57	$	4,621	33,487		(4)	$	6.71
Options outstanding and expected to vest at December 31, 2013	524,753		(2)	$	30.51	3.56	$	4,620
Options exercisable at December 31, 2013	491,461		(3)	$	30.65	3.31	$	4,252
Unrecognized compensation cost, including forfeiture estimate														$	50
Weighted average remaining recognition period (years)														0.37


(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, 2013 of $39.31 which would have been received by the option holders had they all exercised their options as of that date.


(2)	Inclusive of 25,940 stock options outstanding and expected to vest to Directors.


(3)	Inclusive of 22,667 vested stock options outstanding to Directors.


(4)	Inclusive of 3,333 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, 2013, 2012, and 2011 the Company has made the following restricted stock award grants:



	Shares Granted	Plan	Fair Value (1)		Vesting Period
Time-vested
2013
1/16/2013	2,000	2005	$	30.48	Ratably over 3 years from grant date
2/14/2013	93,800	2005	31.51		Ratably over 5 years from grant date
5/21/2013	14,700	2010	33.17		At the end of 5 years from grant date(2)
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)

Performance-based
2011
8/8/2011	3,637	2005	$	23.81	On December 31, 2014, if performance conditions are met

(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 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
	2013		2012		2011
	(Dollars in thousands)
Fair value of restricted stock awards upon vesting	$	3,289	$	2,085	$	1,599

A summary of the status of the Company’s Restricted Stock Award Grants for the year ended December 31, 2013 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, 2013	267,761			$	25.33
Granted	110,500			31.71
Vested/released	(103,234	)		24.04
Forfeited	(3,100	)		27.57
Expired	—			—
Balance at December 31, 2013	271,927		(1)	$	28.39
Unrecognized compensation cost (inclusive of directors’ fees), including forfeiture estimate						$	5,512
Weighted average remaining recognition period (years)						3.37


(1)	Inclusive of 43,000 restricted stock awards outstanding to Directors.