Stock Based Compensation

The Company adopted the 2010 Stock Option Plan (“2010 Plan”) following shareholder approval of the 2010 Plan at the 2010 Annual Meeting. Subsequent to the adoption of the 2010 Plan, no additional grants may be issued under the prior plans. The 2010 Plan provides for grants of up to 348,232 shares, which includes any shares subject to stock awards under the previous stock option plans.

Stock Options: Under the 2010 Plan and previous plans, certain key employees have been granted the option to purchase set amounts of common stock at the market price on the day the option was granted. Optionees, at their own discretion, may cover the cost of exercise through the exchange at the then fair value of already owned shares of the Company’s stock. Options are granted for a 10-year period and vest on a pro-rata basis over the initial three years from grant.

The Company measures the fair value of each stock option at the date of grant using the Black-Scholes option pricing model using assumptions noted in the following table. Expected volatility is based on the historical volatility of the price of the Company’s common stock. The Company uses historical data to estimate option exercise and stock option forfeiture rates within the valuation model. The expected term of options granted is determined based on historical experience with similar options and represents the period of time that options granted are expected to be outstanding. The expected dividend yield is based on dividend trends and the market value of the Company’s common stock at the time of grant. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The following assumptions were used to determine the fair value of stock options as of the grant date to determine compensation expense for the years ended December 31, 2013, 2012, and 2011:



Stock Options:	2013			2012			2011
Grant date fair value		$5.59			$4.42			$4.01
Expected life of options	8 years			8 years			8 years
Risk-free interest rate	2.30		%	1.30		%	1.40		%
Dividend yield rate	2.90		%	2.80		%	2.83		%
Price volatility	28.89		%	28.51		%	28.56		%

The following table summarizes stock options activity during 2013:



	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life, in Years


Outstanding at January 1, 2013	203,125			$20.76
Granted	13,843		23.74
Forfeited	—		—
Exercised	(11,482	)	14.38
Outstanding at December 31, 2013	205,486			$21.32	4.63

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on December 31, 2013 and the exercise price, times the number of shares) that would have been received by the option holders had all the option holders exercised their options on December 31, 2013. This amount changes based on the fair value of the Company’s stock. The total intrinsic value of options exercised for the years ended December 31, 2013, 2012, and 2011 was $92,000, $550,000, and $332,000, respectively.

Proceeds from the exercise of stock options and vesting of restricted stock in 2013, 2012, and 2011 were $165,000, $840,000, and $496,000 respectively. The Company withheld $170,000, $888,000, and $515,000 to pay for stock option exercises or income taxes that resulted from the exercise of stock options in 2013, 2012, and 2011, respectively.

For the year ended December 31, 2013, 2012 and 2011, the Company recognized $87,000, $61,000, and $82,000, respectively, in stock option compensation expense as a component of salaries and other personnel expense. As of December 31, 2013 there was approximately $130,000 of total unrecognized compensation expense related to non-vested options which is expected to be recognized over the weighted-average period of 2.2 years.

Restricted Stock Units: The Company grants restricted stock units to certain key employees periodically. Recipients of restricted stock units do not pay any cash consideration to the Company for the shares and receive all dividends with respect to such shares when the shares vest. Restricted stock units cliff vest at the end of a three-year time period.

The following table summarizes restricted stock unit activity during 2013:



	Number of Shares		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Life, in Years


Outstanding at January 1, 2013	64,177			$18.96
Granted	21,712		23.74
Vested	(26,771	)	18.26
Forfeited	—		—
Outstanding at December 31, 2013	59,118			$21.03	1.93

The total intrinsic value of restricted stock units vested for the years ended December 31, 2013, 2012, and 2011 was $667,000, $556,000, and $567,000, respectively.

For the year ended December 31, 2013, 2012 and 2011, the Company recognized $419,000, $393,000, and $437,000, respectively, in restricted stock unit compensation expense as a component of salaries and other personnel expense. As of December 31, 2013, there was approximately $875,000 of total unrecognized compensation expense related to non-vested options which is expected to be recognized over the weighted-average period of 2.2 years.