Note

– Stock–Based Compensation

NHC recognizes stock–based compensation expense 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 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 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. The shares granted during the nine months ended September 30, 2015 consisted of 45,000 shares to the Directors of the Company. At September 30, 2015, 175,620 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. In May 2015, our stockholders voted to amend the 2010 Plan to increase the number of shares of our common stock authorized under the Plan from the original 1,200,000 shares to 2,575,000 shares. The shares granted during the nine months ended September 30, 2015 consisted of 11,592 shares through the Employee Stock Purchase Plan. At September 30, 2015, 1,762,152 shares were available for future grants under the amended 2010 Plan.

Compensation expense is recognized only for the awards that ultimately vest. Stock–based compensation totaled $425,000 and $377,000 for the three months ended September 30, 2015 and 2014, respectively. Stock–based compensation totaled $1,557,000 and $1,547,000 for the nine months ended September 30, 2015 and 2014, respectively. At September 30, 2015, we had $699,000 of unrecognized compensation cost related to unvested stock option awards. This expense will be recognized over the remaining weighted average vesting period, which is approximately 0.4 years. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of income.

Stock Options

The following table summarizes the significant assumptions used to value the options granted for the nine months ended September 30, 2015 and for the year ended December 31, 2014.

	2015			2014
Risk–free interest rate		0.71	%		0.52	%
Expected volatility		16.5	%		17.3	%
Expected life, in years (years)	2.2			2.2
Expected dividend yield		2.73	%		2.68	%

The following table summarizes our outstanding stock options for the nine months ended September 30, 2015 and for the year ended December 31, 2014.

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value
Options outstanding at January 1, 2014		1,074,552		$	46.44		-
Options granted		57,716			53.10		-
Options exercised		(157,590	)		45.97		-
Options cancelled		(20,000	)		46.69		-
Options outstanding at December 31, 2014		954,678			46.92		-
Options granted		56,792			61.47		-
Options exercised		(176,184	)		46.68		-
Options outstanding at September 30, 2015		835,286		$	47.95	$	10,839,000

Options exercisable at September 30, 2015		187,263		$	51.36	$	1,802,000

Options Outstanding September 30, 2015	Exercise Prices			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years
778,694	$44.80	-	$52.93		$46.97		0.8
56,592	$61.25	-	$62.34		61.47		3.7
835,286					$47.95		0.96

Restricted Stock

The following table summarizes our restricted stock activity for the nine months ended September 30, 2015 and for the year ended December 31, 2014.

	Number of Shares		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Non–vested restricted shares at January 1, 2014		12,000	$	34.46		-
Award shares granted		-		-		-
Award shares vested		6,000		34.46		-
Non–vested restricted shares at December 31, 2014		6,000		34.46		-
Award shares granted		-		-		-
Award shares vested		6,000		34.46		-
Non–vested restricted shares at September 30, 2015		-		-		-