Note 8 - Stock-Based Compensation

Bancorp has a stock-based compensation plan for directors, officers, and other key employees of Bancorp. The aggregate number of shares of common stock that may be issued with respect to the awards granted under the plan is 500,000 plus any shares forfeited under Bancorp’s old stock-based compensation plan. Under the terms of the stock-based compensation plan, Bancorp has the ability to grant various stock compensation incentives, including stock options, stock appreciation rights, and restricted stock. The stock-based compensation is granted under terms and conditions determined by the Compensation Committee of the Board of Directors. Under the stock-based compensation plan, stock options generally have a maximum term of ten years, and are granted with an exercise price at least equal to the fair market value of the common stock on the date the options are granted. Generally, options granted to directors of Bancorp vest immediately, and options granted to officers and employees vest over a five-year period, although the Compensation Committee has the authority to provide for different vesting schedules.

Bancorp follows FASB ASC 718, “Compensation – Stock Compensation”, to account for stock-based compensation. FASB ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense in the statement of operations at fair value. FASB ASC 718 requires an entity to recognize the expense of employee services received in share-based payment transactions and measure the expense based on the grant date fair value of the award. The expense is recognized over the period during which an employee is required to provide service in exchange for the award.

The stock-based compensation expense amounts were derived using the Black-Scholes option-pricing model. The following weighted average assumptions were used to value options granted for the nine months ended September 30, 2013:

Expected life of options	5.0 years
Risk-free interest rate		1.48	%
Expected volatility		70.02	%
Expected dividend yield		0.00	%
Weighted average fair value of options granted	$	2.12

The expected life of options amount is based on the term of the options granted. The risk-free interest rate is based on the US Treasury’s five year Treasury note rate at the time of the option grant. The expected volatility is based on the closing common stock price of Bancorp over a five year period. The expected dividend yield is based on Bancorp’s current policy of not paying a common stock dividend. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.

There were no options granted during the nine months ended September 30, 2014 and 125,000 options granted during the nine months ended September 30, 2013.

Stock-based compensation expense for the three and nine months ended September 30, 2014 totaled $47,000 and $153,000, respectively. Stock-based compensation expense for the three and nine months ended September 30, 2013 totaled $24,000 and $72,000, respectively. There were 700 options exercised during the nine months ended September 30, 2014 and no options exercised during the nine months ended September 30, 2013.

Information regarding Bancorp’s stock-based compensation plan as of and for the nine months ended September 30, 2014 is as follows:

	2014
	Shares			Weighted Average Price
Options outstanding, December 31, 2013		319,000		$	4.23
Options granted		-			-
Options exercised		(700	)	$	3.37
Options forfeited		(27,500	)	$	3.86
Options outstanding, September 30, 2014		290,800		$	4.26
Options exercisable, September 30, 2014		119,893		$	4.14

The aggregate intrinsic value of the options outstanding as of September 30, 2014 and December 31, 2013 was $129,281 and $187,640, respectively. The aggregate intrinsic value of the options exercisable as of September 30, 2014 and December 31, 2013 was $56,809 and $58,153, respectively.

The following table summarizes the nonvested options in Bancorp’s stock-based compensation plan as of September 30, 2014.

	Shares			Weighted Average Grant Date Exercise Price
Nonvested options outstanding, December 31, 2013		236,383		$	4.29
Nonvested options granted		-			-
Nonvested options vested		(37,976	)	$	4.33
Nonvested options forfeited		(27,500	)	$	3.86
Nonvested options outstanding, September 30, 2014		170,907		$	4.35

As of September 30, 2014, there was $535,000 of total unrecognized stock-based compensation expense related to nonvested stock options, which is expected to be recognized over a period of fifty-one months.