Note 9 - Stock-Based Compensation

A. General Information

The Corporation permits the issuance of stock options, dividend equivalents, performance awards, stock appreciation rights, restricted stock and/or restricted stock units to employees and directors of the Corporation under several plans. The terms and conditions of awards under the plans are determined by the Corporation’s Compensation Committee.

Prior to April 25, 2007, all shares authorized for grant as stock-based compensation were limited to grants of stock options. On April 25, 2007, the shareholders approved the Corporation’s “2007 Long-Term Incentive Plan” (the “2007 LTIP”) under which a total of 428,996 shares of the Corporation’s common stock were made available for award grants. On April 28, 2010, the shareholders approved the Corporation’s “2010 Long Term Incentive Plan” (“2010 LTIP”) under which a total of 445,002 shares of the Corporation’s common stock were made available for award grants.

The equity awards granted under the 2007 and 2010 LTIPs were authorized to be in the form of, among others, options to purchase the Corporation’s common stock, restricted stock awards (“RSAs”) and performance stock awards (“PSAs”).

The fair value of an RSA, when granted, is based on the closing price on the day preceding the date of the grant.

The PSAs that have been granted to date vest based on the Corporation’s total shareholder return relative to the performance of the NASDAQ Community Bank Index for the respective period. The amount of PSAs earned will not exceed 100% of the PSAs awarded. The fair value of a PSA, when granted, is calculated using the Monte Carlo Simulation method.

B. Stock Options

Stock-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as an expense over the vesting period. The fair value of stock option grants is determined using the Black-Scholes pricing model. The assumptions necessary for the calculation of the fair value are expected life of options, annual volatility of stock price, risk-free interest rate and annual dividend yield.

The following table provides information about options outstanding for the three months ended September 30, 2013:


	Shares			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Options outstanding, June 30, 2013		688,476		$	20.69	$	4.69
Granted		11,475		$	21.24	$	4.83
Forfeited		—		$	—	$	—
Expired		(250	)	$	22.00	$	4.90
Exercised		(39,600	)	$	20.45	$	4.64

Options outstanding, September 30, 2013		660,101		$	20.72	$	4.70

The following table provides information about options outstanding for the nine months ended September 30, 2013:


	Shares			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Options outstanding, December 31, 2012		784,226		$	20.40	$	4.62
Granted		11,475		$	21.24	$	4.83
Forfeited		(650	)	$	19.65	$	4.62
Expired		(250	)	$	22.00	$	4.90
Exercised		(134,700	)	$	18.93	$	4.22

Options outstanding, September 30, 2013		660,101		$	20.72	$	4.70

The following table provides information about unvested options for the three months ended September 30, 2013:


	Shares			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Unvested options, June 30, 2013		80,106		$	19.89	$	4.65
Granted		11,475		$	21.24	$	4.83
Vested		(61,435	)	$	20.93	$	4.79
Forfeited		—		$	—	$	—

Unvested options, September 30, 2013		30,146		$	18.27	$	4.42

The following table provides information about unvested options for the nine months ended September 30, 2013:


	Shares			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Unvested options, December 31, 2012		80,756		$	19.89	$	4.65
Granted		11,475		$	21.24	$	4.83
Vested		(61,435	)	$	20.93	$	4.79
Forfeited		(650	)	$	19.65	$	4.62

Unvested options, September 30, 2013		30,146		$	18.27	$	4.42

For the three and nine months ended September 30, 2013, the Corporation recognized $65 thousand and $153 thousand, respectively, of expense related to stock options. As of September 30, 2013, the total not-yet-recognized compensation expense of unvested stock options was $89 thousand. This expense will be recognized over a weighted average period of 0.9 years.

Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised during the three months ended September 30, 2013 and 2012 are detailed below:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2013		2012		2013		2012
Proceeds from exercise of stock options	$	810	$	162	$	2,550	$	1,362
Related tax benefit recognized		75		27		231		107

Net proceeds of options exercised	$	885	$	189	$	2,781	$	1,469

Intrinsic value of options exercised	$	215	$	38	$	661	$	269

The following table provides information about options outstanding and exercisable at September 30, 2013:


(dollars in thousands, except exercise price)	Outstanding		Exercisable
Number of shares		660,101		629,955
Weighted average exercise price	$	20.72	$	20.83
Aggregate intrinsic value	$	4,127	$	3,865
Weighted average contractual term in years		3.3		3.1

C. Restricted Stock Awards and Performance Stock Awards

The Corporation has granted RSAs and PSAs under the 2007 LTIP and 2010 LTIP Plans.

The compensation expense for the RSAs is measured based on the market price of the stock on the day prior to the grant date and is recognized on a straight line basis over the vesting period. Stock restrictions are subject to alternate vesting for death and disability and retirement.

For the three and nine months ended September 30, 2013, the Corporation recognized $34 thousand and $163 thousand, respectively, of expense related to the Corporation’s RSAs. As of September 30, 2013, there was $570 thousand of unrecognized compensation cost related to RSAs. This cost will be recognized over a weighted average period of 1.8 years.

For the three and nine months ended September 30, 2013, the Corporation recorded excess tax benefits to additional paid in capital of $8 thousand and $12 thousand related to the vesting of restricted stock awards.

The following table details the unvested RSAs for the three and nine months ended September 30, 2013:


	Three Months Ended September 30, 2013					Nine Months Ended September 30, 2013
	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value
Beginning balance		46,815		$	18.89		56,631		$	19.15
Granted		6,665			22.50		6,665			22.50
Vested		(2,980	)		16.78		(9,115	)		19.20
Forfeited		—			—		(3,681	)		20.38

Ending balance		50,500		$	19.49		50,500		$	19.49

The compensation expense for PSAs is measured based on the grant date fair value as calculated using the Monte Carlo Simulation method.

For the three and nine months ended September 30, 2013, the Corporation recognized $46 thousand and $299 thousand of expense related to the PSAs. As of September 30, 2013, there was $1.7 million of unrecognized compensation cost related to PSAs. This cost will be recognized over a weighted average period of 2.1 years.

For the three and nine months ended September 30, 2013, the Corporation recorded excess tax benefits to additional paid in capital of $320 thousand and $320 thousand related to the vesting of performance stock awards.

The following table details the unvested PSAs for the three and nine months ended September 30, 2013:


	Three Months Ended September 30, 2013					Nine Months Ended September 30, 2013
	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value
Beginning balance		184,191		$	10.62		185,766		$	10.62
Granted		75,714			13.36		75,714			13.36
Vested		(54,925	)		9.64		(54,925	)		9.64
Forfeited		—			—		(1,575	)		10.77

Ending balance		204,980		$	11.90		204,980		$	11.90