7. Earnings Per Share and Stock Options

Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed by dividing net income by the combination of dilutive potential common stock, comprised of shares issuable under the Company's share-based compensation plans and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents includes the dilutive effect of in-the-money share-based awards, which are calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, when share-based awards are exercised, (a) the exercise price of a share-based award; (b) the amount of compensation cost, if any, for future service that the Company has not yet recognized; and (c) the amount of estimated tax benefits that would be recorded in additional paid-in capital, if any, are assumed to be used to repurchase shares in the current period. The incremental dilutive potential common shares, calculated using the treasury stock method was 18,286 and 5,190 for 2011 and 2010, respectively. The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31:


For the Years Ended December 31,		2011		2010
Net income	$	6,933,936	$	6,372,626
Weighted average common shares outstanding - Basic		2,151,350		2,284,657
Incremental shares outstanding assuming
the exercise of dilutive stock options and SARs (share settled)		18,286		5,190
Weighted average common shares outstanding - Diluted		2,169,636		2,289,847
Basic earnings per common share	$	3.22	$	2.79
Diluted earnings per common share	$	3.20	$	2.78

In 2011 and 2010, 11,500 and 13,500 awards, respectively, were excluded from the computation of diluted earnings per share because their exercise price was greater than the stock price and therefore considered anti-dilutive.

The Company has adopted employee stock award plans (the "Plans") under which restricted stock, and options or stock appreciation rights ("SARs") to purchase shares (not to exceed 500,000 shares) of the Company's stock may be granted to key employees or directors of the Company at a price not less than the market value on the date of grant. SARs and options (which have predominantly been incentive stock options) awarded under the Plans thus far are exercisable and vest immediately or within one year or at 10% to 20% per year beginning on the date of grant and generally expire in five to ten years. All SARs issued to date have been share settled only. No SARs were exercised in 2011 or 2010.

A summary of share-based award transactions for all share-based award plans follows:


				Weighted	Average
				Average	Remaining		Aggregate
	Number			Exercise	Contractual		Intrinsic
	of Shares			Price	Term (years)		Value
Outstanding as of January 1, 2010	117,245		$	27.54	5.10	$	541,543
SARs granted	3,000			33.31
Options exercised	(9,445	)		14.88
Options/SARs cancelled/forfeited/expired	-			-
Outstanding as of December 31, 2010	110,800		$	28.77	4.51	$	353,955
SARs granted	3,000			41.50
Options exercised	(7,700	)		20.15
Options/SARs cancelled/forfeited/expired	(4,500	)		28.61
Outstanding as of December 31, 2011	101,600		$	29.81	3.91	$	697,780

Exercisable as of December 31, 2011	99,630		$	29.76	3.91	$	686,604

Unvested as of December 31, 2011	1,970		$	32.28	3.58	$	11,176

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company's common stock at December 31, 2011. The intrinsic values of options exercised during 2011 and 2010 were approximately $118,000 and $158,000, respectively.

The following tables summarize information about fixed stock options outstanding at December 31, 2011:


					Options Outstanding at Year-End				Options Exercisable at Year-End
						Weighted	Weighted				Weighted
						Average	Average				Average
					Number	Remaining	Exercise		Number		Exercise
	Range of Exercise Prices				Outstanding	Contractual Life	Price		Exercisable		Price
$	10.00	-	$	19.99	500	0.28	$	18.92	500	$	18.92
	20.00	-		27.96	5,400	1.10		22.77	4,800		22.87
	27.98	-		31.99	3,700	2.43		31.08	3,080		31.08
	33.32	-		36.79	2,000	3.38		36.79	2,000		36.79
$	10.00	-	$	36.79	11,600	1.88	$	27.67	10,380	$	27.80


					SARs Outstanding at Year-End				SARs Exercisable at Year-End
						Weighted	Weighted				Weighted
						Average	Average				Average
					Number	Remaining	Exercise		Number		Exercise
	Range of Exercise Prices				Outstanding	Contractual Life	Price		Exercisable		Price
$	27.97	-	$	27.97	75,000	4.17	$	27.97	75,000	$	27.97
	32.00	-		32.00	2,500	4.39		32.00	2,500		32.00
	33.31	-		33.31	3,000	5.39		33.31	3,000		33.31
	36.80	-		49.04	9,500	3.70		45.25	8,750		45.57
$	27.97	-	$	49.04	90,000	4.17	$	30.08	89,250	$	29.99

In 2011, 21,336 options and SARs vested with a fair value of $204,965.

During the second quarter of 2011, the Company issued 3,000 share settled SARs to select officers and directors of the Company. During the second quarter of 2010, the Company issued 3,000 share settled SARs to select officers and directors of the Company. SARs give the holder the right to receive stock equal to the appreciation in the value of shares of stock from the grant date for a specified period of time, and as a result, are accounted for as equity instruments. As such, the SARs were valued using the Black-Scholes option valuation model. The fair value of each award is estimated on the date of grant using the Black-Scholes option valuation model with the weighted-average assumptions noted in the following table. Expected volatilities are based on both the implied and historical volatility of the Company's stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of awards represents the period of time that options granted are expected to be outstanding. The interest rate for periods during the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of the grant.

The weighted-average fair values for the SARs issued during 2011 and 2010 were $15.55 and $12.30, respectively, and were estimated using the following weighted-average assumptions:


	2011		2010
Expected Life in Years	5.0		5.0
Expected Volatility	43.6	%	42.4	%
Weighted-Average Volatility	43.6	%	42.4	%
Interest Rate	1.87	%	2.13	%
Yield Rate	0.84	%	0.83	%

There was approximately $214,000 and $217,000 of compensation expense relating to shares vesting on or before December 31, 2011 and December 31, 2010, respectively, included in salaries, employee benefits and payroll taxes of the Consolidated Statements of Income. As of December 31, 2011, there was approximately $42,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Company's stock awards plans. That cost is expected to be recognized over a weighted-average period of approximately 5 months.

The estimated weighted-average grant-date fair value of SARs granted for the years ended December 31 was as follows:


For the Years Ended December 31,		2011		2010
Exercise price equal to market price on date of grant:
Weighted-average market price	$	41.50	$	33.31
Weighted-average grant-date fair value	$	15.55	$	12.30

There are no stock options or SARs granted where the exercise price is less than the market price on the date of grant.