NOTE D: STOCK BASED COMPENSATION

The Company maintains a stock incentive plan under which incentive and nonqualified stock options and other stock awards may be granted. On March 2, 2006, the Company’s Board of Directors (the “Board”) adopted, and shareholders later approved, the 2006 Stock Option Plan (the “2006 Plan”). Under the 2006 Plan, 750,000 shares were reserved for the issuance of stock options to directors, officers, key employees, and others. The option exercise price under the 2006 Plan is the fair market value of the stock on the date the option is granted. The fair market value is determined by the average of the highest and lowest sales prices for a share of the Company’s common stock, on its primary exchange, on the same date that the option is granted. On March 13, 2014, the Company’s Board of Directors adopted, and on May 29, 2014 our shareholders approved, the 2014 Amended and Restated Stock Option and Incentive Plan (the “2014 Plan”) which replaced the 2006 Plan. The shares which remained reserved under the 2006 Plan were carried over to the 2014 Plan and are reserved for the issuance of stock awards to directors, officers, key employees, and others. The stock option exercise price and the restricted stock purchase price under the 2014 Plan shall not be less than 85% of the fair market value of the Company’s common stock on the date the award is granted. The fair market value is determined by the closing price of the Company’s common stock, on its primary exchange, on the same date that the option or award is granted.

Outstanding nonqualified stock options at September 30, 2016, must be exercised within either five or ten years from the date of grant. Outstanding nonqualified stock options granted to members of the Company’s Board of Directors vest immediately while outstanding nonqualified stock options issued to employees vest in increments of 20% to 25% each year.

During the first nine months of 2016, 2,275 shares of common stock were granted to non-employee directors under the 2014 Plan and 5,000 shares of common stock were granted to the Company’s Chief Executive Officer. The stock awarded to non-employee directors had a grant date fair value of $30.80 per share, based on the closing price of the Company’s stock on the date of grant, and vested immediately. The stock awarded to the Chief Executive Officer had a grant date fair value of $30.81 per share, based on the closing price of the Company’s stock on the date of grant, with 25% of the award vesting immediately and 25% vesting for each of the next three years.

The total grant date fair value of stock and stock options vested during the first nine months of 2016 was approximately $202,000. Total pre-tax stock-based compensation expense, recognized in Salaries, wages and benefits, during the third quarter of 2016 was approximately $56,000. Total pre-tax stock-based compensation expense, recognized in Salaries, wages and benefits, during the first nine months of 2016 was approximately $251,000 and includes approximately $70,000 recognized as a result of the grant of 325 shares to each non-employee director during the first quarter of 2016. The recognition of stock-based compensation expense decreased basic earnings per common share by approximately $0.01 during the third quarter ended September 30, 2016. The recognition of stock-based compensation expense decreased diluted and basic earnings per common share by approximately $0.02 and $0.03, respectively, during the nine months ended September 30, 2016. As of September 30, 2016, the Company had stock-based compensation plans with total unvested stock-based compensation expense of approximately $290,000 which is being amortized on a straight-line basis over the remaining vesting period. As a result, the Company expects to recognize approximately $51,000 in additional compensation expense related to unvested option awards during the remainder of 2016 and to recognize approximately $135,000, $98,000, and $6,000 in additional compensation expense related to unvested option awards during the years 2017, 2018, and 2019, respectively.

The total grant date fair value of stock and stock options vested during the first nine months of 2015 was approximately $158,000. Total pre-tax stock-based compensation expense, recognized in Salaries, wages and benefits, during the third quarter of 2015 was approximately $49,000. Total pre-tax stock-based compensation expense, recognized in Salaries, wages and benefits, during the first nine months of 2015 was approximately $218,000 and includes approximately $70,000 recognized as a result of the grant of 175 shares to each non-employee director during the first quarter of 2015. The recognition of stock-based compensation expense decreased diluted earnings per share reported for the third quarter ending September 30, 2015 by approximately $0.01 but did not have a recognizable impact on basic earnings per share reported for the third quarter ended September 30, 2015. The recognition of stock-based compensation expense decreased diluted and basic earnings per common share by approximately $0.02 during the nine months ended September 30, 2015.

Information related to stock option activity for the nine months ended September 30, 2016 is as follows:

	Shares Under Options			Weighted-Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value*
				(per share)		(in years)
Outstanding at January 1, 2016		66,098		$	10.92
Granted		-			-
Exercised		(6,450	)		11.50
Cancelled/forfeited/expired		(2,050	)		10.91
Outstanding at September 30, 2016		57,598		$	10.86		3.5	$	527,714

Exercisable at September 30, 2016		44,798		$	10.85		2.9	$	410,978

___________________________

* The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The per share market value of our common stock, as determined by the closing price on September 30, 2016, was $20.02.

A summary of the status of the Company’s nonvested options and restricted stock as of September 30, 2016 and changes during the nine months ended September 30, 2016, is presented below:

	Stock Options					Restricted Stock
	Number of Options			Weighted- Average Grant Date Fair Value		Number of Shares			Weighted- Average Grant Date Fair Value*
Nonvested at January 1, 2016		28,205		$	6.07		5,700		$	42.65
Granted		-			-		7,275			30.81
Canceled/forfeited/expired		(2,050	)		6.07		(450	)		42.65
Vested		(13,355	)		6.07		(3,825	)		31.73
Nonvested at September 30, 2016		12,800		$	6.06		8,700		$	37.55

___________________________

* The weighted-average grant date fair value was based on the closing price of the Company’s stock on the date of the grant.

The number, weighted average exercise price, and weighted average remaining contractual life of options outstanding as of September 30, 2016 and the number and weighted average exercise price of options exercisable as of September 30, 2016 are as follows:

Exercise Price		Shares Under Outstanding Options		Weighted-Average Remaining Contractual Term		Shares Under Exercisable Options
				(in years)
$	10.44		15,000		1.4		15,000
$	10.90		6,000		0.6		6,000
$	10.90		26,600		5.7		13,800
$	11.22		5,998		4.2		5,998
$	11.54		4,000		0.4		4,000
			57,598		3.5		44,798

Cash received from option exercises totaled approximately $74,000 and $236,000 during the nine months ended September 30, 2016 and September 30, 2015, respectively. The Company issues new shares upon option exercise.