Note 19. Stock Based Compensation

General

We grant stock awards to key executive personnel and to our independent Board of Directors. For further details, see below:

On May 7, 2012, we granted 65,500 restricted stock units payable in shares of our common stock, $1.00 par value per share, to ten key individuals. The grants consisted of three tranches of restricted stock units (“RSUs”) – Time-Based RSUs, Absolute Performance-Based RSUs, and Relative Performance-Based RSUs. If we attain certain performance targets, the 65,500 RSUs could have resulted in us issuing up to 81,188 shares of our stock. As of September 30, 2013, 57,401 shares have been issued and we have a remaining 10,000 RSUs that have not been issued. If we attain certain performance targets at the end of 2014, the 10,000 RSUs could result in us issuing up to 11,500 shares of our stock.

On April 23, 2013, the Compensation Committee of our Board of Directors granted 121,100 restricted stock units payable in shares of our common stock, $1.00 par value per share, to eleven key individuals. The grants issued include 87,300 Time-Based RSUs, 16,901 Absolute Performance-Based RSUs, and 16,899 Relative Performance-Based RSUs. If we attain certain performance targets, the 121,100 RSUs could result in us issuing up to 134,475 shares of our stock.

The fair value of the service based awards was calculated based on the closing market price of our stock as of the grant date times the number of RSUs issued with no forfeitures assumed. For our 2013 awards and 2012 awards, we used the closing market price of our stock on April 23, 2013 and on May 7, 2012 which was $17.66 and $19.35 per share, respectively. The performance based RSUs are subject to vesting upon two different performance metrics: an absolute performance metric based on targeted earnings per share and a relative performance metric based on our total stockholder return over a given period as measured against that of the other companies in the Russell 2000 index. In order to calculate the fair value of our absolute performance RSUs, we multiplied the closing market price of our stock as of the grant date times the number of RSU’s issued with no forfeitures assumed. For our 2013 awards and 2012 awards, we used the closing market price of our stock on April 23, 2013 and on May 7, 2012 which was $17.66 and $19.35 per share, respectively. We measured our related performance RSUs based on market conditions and were accounted for and measured differently from an award that has a performance or service feature. The effect of a market condition is reflected in the award’s fair value on the grant date. In order to derive the fair value of these awards, a Monte-Carlo simulation statistical technique was used to simulate our future stock prices and the components of the Russell 2000 Index. The stock prices were based upon the risk-free rate of return, the volatility of each entity, and the correlation of each entity with the Russell 2000 Index. We multiplied our ending simulated stock price by the payout percentage to determine a projected payout at the end of the performance period. The ending payout was then discounted, using the risk-free rate of return, to the grant date to determine the grant date fair value. Since both the 2013 and 2012 awards provided for both one year vesting (top four named executive officers) and three year vesting (all other award recipients), a fair value was calculated separately for the one and three year awards for each year. The following assumptions were used:



		2013 Awards						2012 Awards
		1 Year Vest			3 Year Vest			1 Year Vest			3 Year Vest

Stock Price	$	17.66		$	17.66		$	19.35		$	19.35
Expected Volatilities		33.5	%		37.03	%		44.31	%		40.50	%
Correlation Coefficients		0.4729			0.6254			0.719			0.6938
Risk Free Rate		0.1	%		0.31	%		0.16	%		0.34	%
Dividend Yield		5.7	%		5.70	%		5.17	%		5.17	%
Simulated Fair Value	$	15.33		$	16.57		$	17.73		$	18.88
Fair Value as a % of Grant		86.81	%		93.83	%		91.63	%		97.57	%

Our operating results, net income and net income before taxes for the periods set forth below include (i) the following amounts of compensation expense associated with the stock grants and RSUs and (ii) the related reductions in earnings per share:



	Three Months ended September 30,				Nine Months ended September 30,
		2013		2012		2013		2012
Stock-Based Compensation
Expense:
Stock Grants to Directors & Officers	$	30,000	$	30,000	$	90,000	$	390,000
RSUs Awards to Officers	$	272,000	$	307,000	$	933,000	$	491,000
Related Reduction in
Earnings Per Share ¹		(0.03)		(0.05)		(0.09)		(0.12)

¹ Same for basic and diluted earnings per share

Stock Awards

On January 15, 2013, our independent Directors received unrestricted stock awards of an aggregate of 6,708 shares from the 2011 Stock Incentive Plan (“the Plan”). For the nine months ended September 30, 2013, our net income reflected $90,000 of stock-based compensation expense charges, exclusive of expense related to the RSUs discussed below, which had no effect on either basic or diluted earnings per share.

A summary of the activity for stock awards during the nine months ended September 30, 2013 is as follows:



	2013
	Shares	Weighted Average Fair Value Per Share
Non-vested - December 31, 2012	-	-
Unrestricted Shares Granted	6,708	$ 17.89
Shares Vested	(6,708)	$ 17.89
Shares Forfeited	-	-
Non-vested - September 30, 2013	-	-

Restricted Stock Units

For three months ended September 30, 2013 and 2012, our net income reflected $272,000 and $307,000, respectively, of RSU stock-based compensation expense charges. For the nine months ended September 30, 2013 and 2012, stock-based compensation expense related to RSUs was $933,000 and $491,000, respectively.

2012 Grants

Our Time-Based RSUs represent the right to receive one share of our common stock and will vest evenly over a three year period, except that the Time-Based RSUs for our top two executives will vest on the first anniversary of the grant date.

Each of our Absolute Performance-Based RSUs represents the right to receive a maximum of one-and-a-half shares of our common stock. These RSUs will pay out based on our basic earnings per share for fiscal year 2012, with the actual number of shares of common stock received dependent on our level of achievement as measured against the target. The maximum pay-out was reached with this target and 18,188 shares vested March 11, 2013, 3,376 additional shares vested on April 23, 2013, due to accelerated vesting of two top executives awards and the remaining 3,000 shares will vest ratably over the next two years.

Each of our Relative Performance-Based RSUs represents the right to receive a maximum of one-and-a-half shares of our common stock. These RSUs will pay out in shares of our common stock based on how our total stockholder return for the three-year period (or the one-year period, for our top four executives) beginning January 1, 2012 compares relative to the total shareholder return of the companies comprising the Russell 2000 index for the same period or periods. For the year ended 2012, the Company ranked in the 27th percentile, which paid out 53% of the RSU’s granted or 5,300 shares vested on March 11, 2013 to two of our top four executives. An additional 1,788 shares vested on April 23, 2013 due to an accelerated vesting period applicable to two of our top four executives, any shares due under these RSUs will be paid out in the fiscal year following the end of the applicable performance period. In all cases, vesting is contingent upon continued employment with the company.

2013 Grants

Our Time-Based RSUs represent the right to receive one share of our common stock and will vest evenly over a three year period beginning in fiscal year 2014. Each of our Absolute Performance-Based RSUs represents the right to receive a maximum of one-and-a-half shares of our common stock. These RSUs will pay out based on our basic earnings per share for fiscal year 2013, with the actual number of shares of common stock received dependent on our level of achievement as measured against the performance level. The shares due under these RSUs will vest evenly over three years beginning in fiscal year 2014, except that the Absolute Performance-Based RSUs for our top four executives are subject to vesting in fiscal year 2014.

In all cases, vesting is contingent upon continued employment with the company. A summary of the activity for the restricted stock awards during the nine months ended September 30, 2013 is as follows:



	Number of RSU's	Weighted Average Grant Date Fair Value
Non-vested - December 31, 2012	65,500	$ 21.48
Additional Awards Granted	8,188	19.35
Awards Granted	121,100	17.37
Awards Exercised	(57,402)	19.15
Awards Cancelled	(6,286)	18.02
Non-vested - September 30, 2013	131,100	$ 18.77

Due to meeting the maximum performance level for the 2012 granted Absolute Performance-Based RSUs, an additional 8,188 shares were awarded. For the top four executives the 2012 granted Relative Performance-Based RSUs met performance level threshold resulted in 53% of the granted awards being exercised and the remaining 6,286 shares were canceled. During first quarter of 2013 we retired a combined total of 8,186 shares of common stock, in order to meet the minimum tax liabilities associated with the vesting of Restricted Stock held by our executive officers. During second quarter of 2013 we retired a combined total of 11,509 shares of common stock, in order to meet the minimum tax liabilities associated with the vesting of Restricted Stock held by our executive officers.