Note

– 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 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.

May 2010,

our stockholders approved the

2010

Omnibus Equity Incentive Plan ("the Equity 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 approved to amend the Equity Plan to increase the number of shares of our common stock authorized from the original

1,200,000

shares to

2,575,000

shares. At

December 31, 2018,

601,244

shares were available for future grants under the Equity Plan.

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. The Company accounts for forfeitures when they occur. Stock–based compensation totaled

$1,778,000,

$1,678,000,

and

$509,000,

for the years ended

December 31, 2018,

2017,

and

2016,

respectively. Stock–based compensation is included in salaries, wages and benefits in the consolidated statements of operations. Tax deductions for the options exercised totaled

$1,047,000,

$933,000,

and

$5,680,000

for the years ended

December 31, 2018,

2017,

and

2016,

respectively. The total intrinsic value of shares exercised was

$1,047,000,

$933,000,

and

$7,431,000

for the years ended

December 31, 2018,

2017

and

2016,

respectively.

December 31, 2018,

the Company had

$4,961,000

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

three

-year period.

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,
	2018			2017			2016
Risk–free interest rate		2.46	%		2.08	%		0.89	%
Expected volatility		16.1	%		16.6	%		15.8	%
Expected life, in years		3.0			4.8			2.2
Expected dividend yield		3.29	%		3.10	%		3.09	%

The following table summarizes option activity:

	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		1,125,443			72.96		−
Options exercised		(48,995	)		51.25		−
Options cancelled		(15,000	)		72.94		−
Options outstanding at December 31, 2017		1,239,407			71.19		--
Options granted		110,265			61.39		--
Options exercised		(68,291	)		54.31		--
Options cancelled		(118,000	)		72.11		--
Options outstanding at December 31, 2018		1,163,381		$	71.16	$	8,483,000

Options exercisable at December 31, 2018		185,881		$	64.41	$	2,609,000

Options Outstanding December 31, 2018	Exercise Prices				Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years
175,106		$52.93	–	$62.78	$	61.10		2.8
988,275			$72.94			72.94		3.2
1,163,381					$	71.16		3.1