NOTE 7. Share-Based Compensation

Stock options and restricted stock awards ("RSAs") have been issued to directors, officers and other management employees under the Corporation's 1999 Long-term Equity Incentive Plan and the 2009 Long-term Equity Incentive Plan. The stock options, which have a ten-year life, become 100 percent vested ranging from three months to two years and are fully exercisable when vested. Option exercise prices equal the Corporation's common stock closing price on NASDAQ on the date of grant. RSAs provide for the issuance of shares of the Corporation's common stock at no cost to the holder and generally vest after three years. The RSAs vest only if the employee is actively employed by the Corporation on the vesting date and, therefore, any unvested shares are forfeited. RSAs for employees retired from the Corporation are either immediately vested at retirement or continue to vest after retirement, depending on which plan the shares were granted under. Deferred stock units ("DSUs") have been credited to non-employee directors who have elected to defer payment of compensation under the Corporation's 2008 Equity Compensation Plan for Non-employee Directors. DSUs credited are equal to the restricted shares that the non-employee director would have received under the plan. As of June 30, 2011, all outstanding DSUs were converted to RSA’s due to director retirements.

The Corporation’s 2009 Employee Stock Purchase Plan (“ESPP”) provides eligible employees of the Corporation and its subsidiaries an opportunity to purchase shares of common stock of the Corporation through quarterly offerings financed by payroll deductions. The price of the stock to be paid by the employees shall be equal to 85 percent of the average of the closing price of the Corporation’s common stock on each trading day during the offering period. However, in no event shall such purchase price be less than the lesser of an amount equal to 85 percent of the market price of the Corporation’s stock on the offering date or an amount equal to 85 percent of the market value on the date of purchase. Common stock purchases are made quarterly and are paid through advance payroll deductions up to a calendar year maximum of $25,000.

Compensation expense related to unvested share-based awards is recorded by recognizing the unamortized grant date fair value of these awards over the remaining service periods of those awards, with no change in historical reported fair values and earnings. Awards are valued at fair value in accordance with provisions of share-based compensation guidance and are recognized on a straight-line basis over the service periods of each award. To complete the exercise of vested stock options, RSA’s and ESPP options, the Corporation generally issues new shares from its authorized but unissued share pool. Share-based compensation for the three months and six months ended June 30, 2011, was $350,000 and $718,000, respectively compared to $448,000 and $933,000, respectively, for the three months and six months ended June 30, 2010. Share-based compensation has been recognized as a component of salaries and benefits expense in the accompanying Consolidated Condensed Statements of Income.

The estimated fair value of the stock options granted during 2011, and in prior years, was calculated using a Black Scholes option pricing model. The following summarizes the assumptions used in the 2011 Black Scholes model:

Risk-free interest rate	2.74%
Expected price volatility	45.43%
Dividend yield	3.65%
Forfeiture rate	5.00%
Weighted-average expected life, until exercise	6.91	years

The Black Scholes model incorporates assumptions to value share-based awards. The risk-free rate of interest, for periods equal to the expected life of the option, is based on a U.S. government instrument over a similar contractual term of the equity instrument. Expected price volatility is based on historical volatility of the Corporation’s common stock. In addition, the Corporation generally uses historical information to determine the dividend yield and weighted-average expected life of the options until exercise. Separate groups of employees that have similar historical exercise behavior with regard to option exercise timing and forfeiture rates are considered separately for valuation and attribution purposes.

Share-based compensation expense recognized in the Consolidated Condensed Statements of Income is based on awards ultimately expected to vest and is reduced for estimated forfeitures. Share-based compensation guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be approximately five percent for the six months ended June 30, 2011, based on historical experience.

The following table summarizes the components of the Corporation's share-based compensation awards recorded as expense:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Stock and ESPP Options
Pre-tax compensation expense	$	38		$	162		$	109		$	345
Income tax benefit					(14	)		(1	)		(31	)
Stock and ESPP option expense, net of income taxes	$	38		$	148		$	108		$	314
Restricted Stock Awards
Pre-tax compensation expense	$	312		$	286		$	609		$	588
Income tax benefit		(111	)		(100	)		(213	)		(206	)
Restricted stock awards expense, net of income taxes	$	201		$	186		$	396		$	382
Total Share-Based Compensation:
Pre-tax compensation expense	$	350		$	448		$	718		$	933
Income tax benefit		(111	)		(114	)		(214	)		(237	)
Total share-based compensation expense, net of income taxes	$	239		$	334		$	504		$	696

As of June 30, 2011, unrecognized compensation expense related to stock options and RSAs totaling $101,000 and $1,584,000, respectively, is expected to be recognized over weighted-average periods of 1.09 and 1.75 years, respectively.

Stock option activity under the Corporation's stock option plans, as of June 30, 2011, and changes during the six months ended June 30, 2011, were as follows:

	Number of Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2011		1,061,429		$	23.01
Granted/ Converted		40,296		$	9.17
Exercised		-			-
Cancelled		(6,180	)	$	26.13
Outstanding June, 2011		1,095,545		$	22.54		4.82		119,704
Vested and Expected to Vest at June 30, 2011		1,095,545		$	22.54		4.55		119,704
Exercisable at June 30, 2011		1,024,745		$	23.57		4.52		12,555

The weighted-average grant date fair value was $3.08 for stock options granted during the six months ended June 30, 2011.

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that would have been received by the option holders had all option holders exercised their stock options on June 30, 2011. The intrinsic value is the difference between the Corporation's closing stock price on the last trading day of the first six months of 2011 and the exercise price, multiplied by the number of in-the-money options. The amount of aggregate intrinsic value will change based on the fair market value of the Corporation's common stock. There were no stock options exercised during the first six months of 2011.

The following table summarizes information on unvested RSAs outstanding as of June 30, 2011:

	Number of Shares			Weighted-Average Grant Date Fair Value
Unvested RSAs at January 1, 2011		272,737		$	12.46
Granted		128,013		$	9.04
Forfeited		(2,635	)	$	8.45
Vested		(68,205	)	$	23.54
Unvested RSAs at June 30, 2011		329,910		$	8.87

The grant date fair value of ESPP options was estimated at the beginning of the April 1, 2011, quarterly offering period of approximately $16,000. The ESPP options vested during the three months ending June 30, 2011, leaving no unrecognized compensation expense related to unvested ESPP options at June 30, 2011.