STOCK BASED COMPENSATION PLAN

9 Months Ended

Sep. 30, 2012

Disclosure Of Compensation Related Costs, Share-Based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

8. STOCK BASED COMPENSATION PLAN

Our 2006 Stock Option and Incentive Compensation Plan, which is shareholder approved, authorizes us to grant restricted stock and incentive or non-qualified stock options to key employees and directors for a total of 763,935 shares of our common stock. We believe that the ability to award stock options and other forms of stock-based incentive compensation can assist us in attracting and retaining key employees. Stock-based incentive compensation is also a means to align the interests of key employees with those of our stockholders by providing awards intended to reward recipients for our long-term growth. Options to purchase shares generally vest over periods of one to five years and expire ten years after the date of grant. We issue new shares of common stock upon the exercise of stock options. If options or awards granted under the 2006 Plan expire or terminate for any reason without having been exercised in full or released from restriction, the corresponding shares shall again be available for option or award for the purposes of the Plan. At September 30, 2012, options and restricted stock available for future grant under the 2006 Plan totaled 270,912.

Compensation cost related to options and restricted stock granted under the 2006 Plan that was charged against earnings for the nine month periods ended September 30, 2012 and 2011 was $202,000 and $143,000. As of September 30, 2012 there was $447,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 Plan. That cost is expected to be recognized over a weighted-average period of 3.2 years.

Stock Options – The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses various weighted-average assumptions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the fluctuation in the price of a share of stock over the period for which the option is being valued and the expected life of the options granted represents the period of time the options are expected to be outstanding.

The weighted-average assumptions for options granted during the nine month period ended September 30, 2012 and the resulting estimated weighted average fair value per share is presented below. No other options have been granted during 2012.

	September 30,
	2012
Assumptions:
Risk-free interest rate		1.76	%
Expected dividend yield		-	%
Expected life (years)		10
Expected common stock market price volatility		54	%
Estimated fair value per share	$	2.01

A summary of option activity under the 2006 Plan for the nine month period ended September 30, 2012 is presented below:

						Weighted
				Weighted		Average
	Number			Average		Remaining		Aggregate
	of			Exercise		Contractual		Intrinsic
	Options			Price		Term		Value
								(Dollars In Thousands)
Outstanding, beginning of period		363,240		$	9.62
Granted during period		36,000			3.13
Forfeited during period		(9,000	)		1.81
Exercised during period		-			-
Outstanding, end of period		390,240		$	9.20		7.0	$	166
Eligible for exercise at period end		143,416		$	17.81		4.3	$	-

There were no options exercised, modified or settled in cash for the periods ended September 30, 2012 and 2011. Management expects all outstanding unvested options will vest.

Restricted Stock – In addition to stock options, on December 31, 2010, we granted 36,855 shares of restricted common stock at the weighted average current market price of $4.07. No restricted stock had been granted prior to December 31, 2010. The restricted stock vests on December 31, 2012, provided that the recipient has continued to perform substantial services for the Bank through that date.  The restricted stock will become 100% vested before the vesting date upon the recipient’s death or disability or a change of control event as defined by federal regulations. Any dividends declared on the restricted stock prior to vesting will be retained and paid only on the date of vesting. The recipient may not transfer, pledge or dispose of the restricted stock before the date of vesting, and thereafter only in proportion to percentage of the preferred shares originally issued to the U.S. Treasury that have been redeemed. As of September 30, 2012 there was $19,000 of total unrecognized compensation cost related to the restricted stock. That cost is expected to be recognized over the remaining vesting period of .25 years.

On September 19, 2012 our board of directors adopted the 2012 Non-Employee Director Equity Compensation Program (the “Director Program”). The Director Program enables us to compensate non-employee directors for their service with stock awards. We currently do not pay cash compensation to non-employee directors pursuant to agreements with bank regulatory agencies. The board has reserved 200,000 of the shares authorized for issuance under our shareholder approved 2006 Stock Option and Incentive Compensation Plan for stock awards under the Director Program.

The Director Program provides that each non-employee director elected or continuing in office on the date of each annual meeting of the Company’s shareholders will automatically receive an award of restricted stock on that date having a value of $30,000, based on the closing sale price per share of the Company’s common stock on the award date, rounded up to the next whole number. The recipient may not transfer, pledge or dispose of the restricted stock until the close of business on the day immediately preceding the first anniversary of the award date. The transfer restrictions will also expire upon the occurrence of a Change of Control, as defined in the Plan, or upon the recipient’s death or disability. If a director ceases to serve as a member of the board for any reason, that director will automatically forfeit any unvested shares subject to an award. Any dividends declared on the restricted stock prior to vesting will be retained and paid only on the date the transfer restrictions expire.

In addition, the Director Program provides for an initial $30,000 grant of restricted stock to each non-employee director in office on the date the Program is adopted. Accordingly, on September 19, 2012, the Company’s eight non-employee directors received an initial award of 8,241 restricted shares each, or 65,928 shares in total, at the weighted average current market price of $3.64 per share. The restricted stock will vest at the close of business on the day immediately preceding the date of the 2013 annual meeting of the Corporation’s shareholders, provided that the recipient has continued to serve as a member of the Board as of the date of vesting. As of September 30, 2012 there was $180,000 of total unrecognized compensation cost related to the restricted stock. That cost is expected to be recognized over the remaining vesting period of .75 years.