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 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.

May

2015,

our stockholders voted to amend the

2010

Omnibus Equity Incentive Plan (“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

three

months ended

March

31,

2017

consisted of

9,925

shares through the Employee Stock Purchase Plan and

1,062,500

to key employees. At

March

31,

2017,

621,244

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

$92,000

and

$286,000

for the

three

months ended

March

31,

2017

and

2016,

respectively. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of income.

March

31,

2017,

the Company had

$8,382,000

of unrecognized compensation cost related to unvested stock–based compensation awards. This unrecognized compensation cost will be amortized over an approximate

five

year period.

Stock Options

The following table summarizes the significant assumptions used to value the options granted for the

three

months ended

March

31,

2017

and for the year ended

December

31,

2016.

	2017			2016
Risk–free interest rate		2.11	%		0.89	%
Expected volatility		16.6	%		15.8	%
Expected life, in years		5.0			2.2
Expected dividend yield		3.11	%		3.09	%

The following table summarizes our outstanding stock options for the

three

months ended

March

31,

2017

and for the year ended

December

31,

2016.

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value
Options outstanding at January 1, 2016		621,390		$	48.15	$	–
Options granted		56,291			62.54		–
Options exercised		(499,066	)		47.16		–
Options cancelled		(656	)		46.69		–
Options outstanding at December 31, 2016		177,959			55.48		–
Options granted		1,072,425			72.96		–
Options exercised		(16,992	)		48.08		–
Options cancelled		–			–		–
Options outstanding at March 31, 2017		1,233,392		$	70.78	$	2,421,000

Options exercisable at March 31, 2017		160,967		$	56.26	$	2,421,000

Options Outstanding March 31, 2017	Exercise Prices			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years
75,000	$44.80	-	$52.93	$	49.66		1.4
1,158,392	$61.25	-	$75.45		72.15		4.8
1,233,392				$	70.78		4.6