Stock-Based Compensation

6 Months Ended

Jun. 30, 2011

Stock-Based Compensation

Stock-Based Compensation

Note 9. Stock-Based Compensation

As of June 30, 2011, we had four active stock-based employee compensation plans, which are more fully described in Note 16 of the Consolidated Financial Statements in 1st Source’s Annual Report on Form 10-K for the year ended December 31, 2010.  These plans include the 2001 Stock Option Plan, the Employee Stock Purchase Plan, the Executive Incentive Plan, and the Restricted Stock Award Plan.  The 2011 Stock Option Plan was approved by the shareholders on April 21, 2011 but we had not made any grants through June 30, 2011.

Stock-based compensation expense for all stock-based compensation awards granted is based on the grant-date fair value.  For all awards except stock option awards, the grant date fair value is either the fair market value per share or book value per share (corresponding to the type of stock awarded) as of the grant date.  For stock option awards, the grant date fair value is estimated using the Black-Scholes option pricing model.  For all awards we recognize these compensation costs only for those shares expected to vest on a straight-line basis over the requisite service period of the award, for which we use the related vesting term.  We estimate forfeiture rates based on historical employee option exercise and employee termination experience.  We have identified separate groups of awardees that exhibit similar option exercise behavior and employee termination experience and have considered them as separate groups in the valuation models and expense estimates.

The stock-based compensation expense recognized in the condensed consolidated statement of income for the six months ended June 30, 2011 and 2010 was based on awards ultimately expected to vest, and accordingly has been adjusted by the amount of estimated forfeitures.  GAAP requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  Forfeitures were estimated based partially on historical experience.

The aggregate intrinsic value in the table below represents the total pretax intrinsic value (the difference between 1st Source’s closing stock price on the last trading day of the second quarter of 2011 (June 30, 2011) and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2011.  This amount changes based on the fair market value of 1st Source’s stock.  Total fair value of options vested and expensed was $4 thousand and $6 thousand, net of tax, for the six months ended June 30, 2011 and 2010, respectively.

					Average
			Weighted		Remaining	Total
			Average		Contractual	Intrinsic
	Number of		Exercise		Term	Value
	Shares		Price		(in years)	(in 000’s)
Options outstanding, beginning of year	62,508		$	17.18
Granted	—		—
Exercised	—		—
Forfeited	(7,508	)	17.31
Options outstanding, June 30, 2011	55,000		$	17.16	0.76	$	200
Vested and expected to vest at June 30, 2011	55,000		$	17.16	0.76	$	200
Exercisable at June 30, 2011	55,000		$	17.16	0.76	$	200

No options were granted during the six months ended June 30, 2011.

As of June 30, 2011, there was $4.82 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements.  That cost is expected to be recognized over a weighted-average period of 3.66 years.

The following table summarizes information about stock options outstanding at June 30, 2011:

	Options Outstanding				Options Exercisable
		Weighted
		Average	Weighted			Weighted
Range of	Number	Remaining	Average		Number	Average
Exercise	of shares	Contractual	Exercise		of shares	Exercise
Prices	Outstanding	Life	Price		Exercisable	Price
$12.04 to $17.99	22,000	1.81	$	12.04	22,000	$	12.04
$18.00 to $26.99	33,000	0.06	20.58		33,000	20.58

The fair value of each stock option was estimated on the date of grant using the Black-Scholes option-pricing model.