Note 14 - Stock-Based Compensation

12 Months Ended

Dec. 31, 2011

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

Note 14 - Stock-Based Compensation

NHC recognizes stock-based compensation for all stock options and restricted stock granted over the requisite service period using the fair value for these grants as estimated at the date of grant either using the Black-Scholes pricing model for stock options or the quoted market price for restricted stock.

The 2005 and 2010 Stock-Based Compensation Plans

The Compensation Committee of the Board of Directors ("the Committee") has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option ("ISO"), a non–qualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding.  The exercise price of any ISO’s granted will not be less than 100% of the fair market value of the shares of common stock on the date granted and the term of an ISO may not be any more than ten years.  The exercise price of any non–qualified options granted will not be less than 100% of the fair market value of the shares of common stock on the date granted unless so determined by the Committee.

In May 2005, our stockholders approved the 2005 Stock Option, Employee Stock Purchase, Physician Stock Purchase and Stock Appreciation Rights Plan ("the 2005 Plan") pursuant to which 1,200,000 shares of our common stock were available to grant as stock-based payments to key employees, directors, and non-employee consultants.  At December 31, 2011, 30,000 shares were available for future grants under the 2005 Plan.

In May 2010, our stockholders approved the 2010 Omnibus Equity Incentive Plan ("the 2010 Plan") pursuant to which 1,200,000 shares of our common stock were available to grant as stock-based payments to key employees, directors, and non-employee consultants.  At December 31, 2011, 534,048 shares were available for future grants under the 2010 Plan.

Under both the 2005 and 2010 Plans, the individual restricted stock and option grant awards vest over periods up to five years.  The term of the options outstanding under both Plans is five years from the date of the grant.  Our policy is to issue new shares to satisfy option exercises.

Additionally, we have an employee stock purchase plan that allows employees to purchase our shares of stock through payroll deductions.  The plan allows employees to terminate participation at any time.

Compensation expense is recognized only for the awards that ultimately vest.  Stock-based compensation totaled $2,751,000, $321,000, and $1,134,000 for the years ended December 31, 2011, 2010, and 2009, respectively.  The expense for the 2011 year consisted of $2,545,000 for stock options and $206,000 for restricted stock.  Stock-based compensation expense for the 2011 year increased $1,462,000 due to the Company granting 1,200,000 options to purchase shares of stock in March 2011.  The vesting period for these options is five years and expires February 2016.  The expense for the 2011 year also increased $771,000 due to the Company choosing to accelerate the vesting date of options to purchase 158,000 shares of stock that were granted in June 2010.  The options had an original vesting date in June 2015.  Tax deductions totaled $1,054,000, $691,000, and $9,057,000 for the years ended December 31, 2011, 2010, and 2009, respectively.

At December 31, 2011, we had $7,972,000 of unrecognized compensation cost related to unvested stock-based compensation awards, which consisted of $7,279,000 for stock options and $693,000 for restricted stock.  This expense will be recognized over the remaining weighted average vesting period, which is approximately 4.2 years for stock options and 1.8 years for restricted stock.  Stock-based compensation is included in salaries, wages and benefits in the consolidated statements of income.

Stock Options

The Company is required to estimate the fair value of stock-based awards on the date of grant.  The fair value of each option award is estimated using the Black–Scholes option valuation model with the weighted average assumptions indicated in the following table.  Each grant is valued as a single award with an expected term based upon expected employment and termination behavior.  Compensation cost is recognized over the requisite service period in a manner consistent with the option vesting provisions.  The straight–line attribution method requires that compensation expense is recognized at least equal to the portion of the grant–date fair value that is vested at that date.  The expected volatility is derived using weekly historical data for periods immediately preceding the date of grant.  The risk–free interest rate is the approximate yield on the United States Treasury Strips having a life equal to the expected option life on the date of grant.  The expected life is an estimate of the number of years an option will be held before it is exercised.  The following table summarizes the assumptions used to value the options granted in the periods shown.

	Year Ended December 31,
	2011			2010			2009
Risk-free interest rate		2.02	%		1.88	%		0.96	%
Expected volatility		23.7	%		25.3	%		29.1	%
Expected life, in years	4.8 years			4.5 years			2.0 years
Expected dividend yield		3.62	%		3.55	%		2.99	%
Expected forfeiture rate		0.00	%		0.00	%		0.00	%

The following table summarizes option activity:

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value
Options outstanding at December 31, 2008		992,196		$	30.55	$	−
Options granted		113,914			37.37		−
Options exercised		(685,805	)		22.44		−
Options cancelled		(35,000	)		55.00		−
Options outstanding at December 31, 2009		385,305			44.78		−
Options granted		180,485			35.55		−
Options exercised		(72,149	)		36.69		−
Options cancelled		(21,314	)		32.01		−
Options outstanding at December 31, 2010		472,327			43.07		−
Options granted		1,264,719			46.58		−
Options exercised		(224,969	)		37.30		−
Options cancelled		(30,000	)		44.25		−
Options outstanding at December 31, 2011		1,482,077		$	46.92	$	258,000
Options exercisable		282,077		$	47.89	$	258,000

Options Outstanding December 31, 2011		Exercise Prices		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years
	61,457	$	37.70	$	37.70		2.3
	1,245,000	$	45.80 - $46.69	$	46.66		4.2
	175,620	$	51.50 - $52.50	$	51.99		0.8
	1,482,077			$	46.84		3.7

At December 31, 2011, 282,077 options outstanding are exercisable.  Exercise prices on the options range from $37.70 to $52.50.  The weighted average remaining contractual life of all options outstanding at December 31, 2011 is 3.7 years.  The total intrinsic value of shares exercised during the year ended December 31, 2011 was $1,188,000.

Restricted Stock

The following table summarizes our restricted stock activity:

	Number of Shares		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Unvested restricted shares at December 31, 2009		–	$	–		–
Award shares granted		30,000		34.46		–
Award shares vested		–		–		–
Unvested restricted shares at December 31, 2010		30,000		34.46		–
Award shares granted		–		–		–
Award shares vested		6,000		34.46		–
Unvested restricted shares at December 31, 2011		24,000	$	34.46	$	179,000

The weighted average remaining contractual life of restricted stock at December 31, 2011 is 1.8 years.