Note 16. Share-based Compensation

12 Months Ended

Dec. 31, 2012

Notes

Note 16. Share-based Compensation

Note 16.          Share-Based Compensation

IHC and AMIC each have share-based compensation plans. The following is a summary of the activity pertaining to each of these plans. AMIC disclosures reflect activity subsequent to the Acquisition Date.

A)                IHC Share-Based Compensation Plans

In June 2003, the stockholders approved the Independence Holding Company 2003 Stock Incentive Plan (the "2003 Plan") under which, 693,000 shares of common stock were reserved for options and other common stock awards. The final option grants under the 2003 Plan were made during 2006.

            In June 2006, the stockholders approved the Independence Holding Company 2006 Stock Incentive Plan (the “2006 Plan") under which, 1,430,000 shares of common stock were reserved for options and other common stock awards.

Under the terms of IHC’s stock-based compensation plans, option exercise prices are more than or equal to the quoted market price of the shares at the date of grant; option terms range from five to ten years; and vesting periods are three years for employee options.  The Company may also grant shares of restricted stock, share appreciation rights (“SARs”) and share-based performance awards. Restricted shares are valued at the quoted market price of the shares at the date of grant and have a three year vesting period. Exercise prices of SARs are more than or equal to the quoted market price of IHC shares at the date of the grant and have three year vesting periods.

At December 31, 2012, there were 357,118 shares available for future stock-based compensation grants under IHC’s stock incentive plans.

Total share-based compensation expense recorded for the years ended December 31, 2012, 2011 and 2010 was $799,000, $573,000 and $672,000, respectively, and the related tax benefits recognized for the years ended December 31, 2012, 2011 and 2010 were $319,000, $228,000 and $268,000, respectively.

Stock Options

The Company’s stock option activity for the year ended December 31, 2012 was as follows:

	Shares	Weighted- Average
	Under Option	Exercise Price
December 31, 2011	758,714	$	9.71
Forfeited	(3,667)	9.09
Expired	(61,211)	13.73
December 31, 2012	693,836	$	9.36

The following table summarizes information regarding outstanding and exercisable options:

		December 31, 2012
		Outstanding		Exercisable
Number of options		693,836		528,176
Weighted average exercise price per share	$	9.36	$	9.45
Aggregate intrinsic value for all options	$	84	$	84
Weighted average contractual term remaining		1.5 years		1.3 years

The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. The weighted average grant-date fair value of options granted during the year ended December 31, 2010 was $1.43 per share. No options were granted in 2012 or 2011. The assumptions set forth in the table below were used to value these grants:

	2010
Weighted-average risk-free interest rate	2.3%
Annual dividend rate per share	0.5%
Weighted-average volatility factor of the
Company's common stock	45.0%
Weighted-average expected term of options	4.5 years

Compensation expense of $237,000, $292,000 and $494,000 was recognized in the years ended December 31, 2012, 2011 and 2010, respectively, for the portion of the grant-date fair value of stock options vested during that period.

As of December 31, 2012, compensation costs related to non-vested stock options have been substantially recognized as those shares will fully vest in the first week in January 2013.

Restricted Stock

IHC issued 7,425 restricted stock awards during years ended December 31, 2012 and 2011, and issued 2,475 restricted stock awards in the year ended December 31, 2010 with weighted-average grant-date fair values of $9.39, $9.84 and $6.37 per share, respectively. The total fair value of restricted stock that vested in 2012, 2011 and 2010 was $40,000, $23,000 and $23,000, respectively. Restricted stock expense was $45,000, $27,000 and $28,000 in 2012, 2011 and 2010, respectively.

The following table summarizes IHC’s restricted stock activity for the year ended December 31, 2012:

	No. of	Weighted-Average
	Non-vested	Grant-Date
	Shares	Fair Value
December 31, 2011	9,900	$	8.95
Granted	7,425		9.39
Vested	(4,125)		8.40
December 31, 2012	13,200	$	9.37

At December 31, 2012, the total unrecognized compensation cost related to non-vested restricted stock awards was $96,000 which is expected to be recognized as compensation expense over a weighted average period of 2.0 years.

SARs and Share-Based Performance Awards

IHC had 269,950 and 230,450 SAR awards outstanding at December 31, 2012 and 2011, respectively. During the year ended 2012 and 2011, the Company granted 56,000 SAR awards and 120,450 SAR awards, respectively. The fair value of SARs is calculated using the Black-Scholes valuation model at the grant date and each subsequent reporting period until settlement. Compensation cost is based on the proportionate amount of the requisite service that has been rendered to date. Once fully vested, changes in fair value of the SARs continue to be recognized as compensation expense in the period of the change until settlement. For years ended December 31, 2012, 2011 and 2010, IHC recorded $428,000, $209,000 and $79,000, respectively, of compensation costs for these awards.  In 2012, 13,750 SARs were exercised with an aggregate intrinsic value of $33,000, and 2,750 SARs were forfeited. NoSARs were exercised or forfeited during the years ended December 31, 2011 or 2010. Included in Other Liabilities in the Company’s Consolidated Balance Sheets at December 31, 2012 and December 31, 2011 are liabilities of $683,000 and $288,000, respectively, pertaining to SARs.

Other outstanding awards include share-based performance awards. Compensation costs for these awards are recognized and accrued as performance conditions are met, based on the current share price. For the years ended December 31, 2012, 2011 and 2010, IHC recorded $89,000, $45,000 and $74,000, respectively, of compensation costs for these awards.  The intrinsic value of share-based performance awards paid during the years ended December 31, 2012, 2011 and 2010 was $57,000, $55,000 and $54,000, respectively. Included in the other liabilities on the Company’s Consolidated Balance Sheets at December 31, 2012 and 2011 are liabilities of $97,000 and $65,000, respectively, pertaining to share-based performance awards.

B)        AMIC Share-Based Compensation Plans

Total AMIC share-based compensation expense was $33,000 and $43,000 for the years ended December 31, 2012 and 2011, respectively, and was $62,000 for the period between the Acquisition Date and December 31, 2010. Related tax benefits of $11,000 and $15,000 were recognized for the years ended December 31, 2012 and 2011, respectively, and $21,000 was recognized for the period between the Acquisition Date and December 31, 2010.

Effective July 1, 2009, AMIC implemented the 2009 Stock Incentive Plan (“AMIC 2009 Plan”), which the AMIC stockholders approved on June 19, 2009.  The AMIC 2009 Plan provided for the grants of non-statutory and incentive stock options, stock appreciation rights, restricted stock awards, performance shares, and other awards to officers, employee and other individuals.  Under the terms of the AMIC 2009 Plan, stock options have a maximum term of ten years from the date of grant, and have various vesting criteria depending on the grant with most grants vesting ratably over four years.  AMIC’s 1998 Plan, which expired by its terms on October 7, 2008, had reserved for issuance a total of 7,154,198 common stock shares.  At December 31, 2012, stock options for 227,285 common stock shares were outstanding, stock options for 215,062 common stock shares were vested, and 6,517,221 common stock shares that had not been issued remained available for future stock options grants and other awards.  Awards made under AMIC’s 1998 Plan prior to its expiration are still in effect.

Stock Options

The following table summarizes information regarding AMIC’s outstanding and exercisable options for the year ended December 31, 2012:

	Shares	Weighted- Average
	Under Option	Exercise Price
December 31, 2011	333,956	$	10.43
Expired	(90,003)		7.87
Forfeited	(16,668)		11.10
December 31, 2012	227,285	$	11.40

The following table summarizes information regarding AMIC’s outstanding and exercisable options as of December 31, 2012:

		December 31, 2012
		Outstanding		Exercisable
Number of options		227,285		215,062
Weighted average exercise price per share	$	11.40	$	11.74
Aggregate intrinsic value for all options (in thousands)	$	5	$	4
Weighted average contractual term remaining		3.08 years		2.79 years

The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. No options were granted during the year ended December 31, 2012. The weighted average grant-date fair-value of options granted during the year ended December 31, 2011 and during the period between the Acquisition Date and December 31, 2010 was $3.02 and $2.79 per share, respectively. The assumptions set forth in the table below were used to value the stock options granted during the periods:

	2011	2010
Weighted-average risk-free interest rate	3.11	3.69
Annual dividend rate per share	-	-
Weighted-average volatility factor of the Company's common stock	36.89%	45.0%
Weighted-average expected term of options	5 years	5 years

Compensation expense of $33,000, $36,000 and $47,000 was recognized for the years ended December 31, 2012, 2011, and for the period between the Acquisition Date and December 31, 2010, respectively, representing the portion of the grant-date fair value of AMIC’s stock options vesting during those periods.

No options were exercised during the year ended December 31, 2012. AMIC received cash proceeds of $57,000 upon the exercise of 13,611 options with an intrinsic value of $11,000 during the year ended December 31, 2011. AMIC received cash proceeds of $45,000 upon the exercise of 10,000 options with an intrinsic value of $1,000 during the period between the Acquisition Date and December 31, 2010.

As of December 31, 2012, the total unrecognized compensation expense related to AMIC’s non-vested options was $48,000 which will be recognized over the remaining requisite service periods.

Restricted Stock

AMIC issued 12,000 restricted stock awards in the second quarter of 2008, with a weighted average grant-date fair value of $6.92 per share.  No restricted stock awards were issued since then. AMIC had no unvested restricted stock awards outstanding at December 31, 2012 and 2011. The total fair value of AMIC’s restricted stock that vested during the year ended December 31, 2011 and during the period between the Acquisition Date and December 31, 2010 was $12,000 and $13,000, respectively. Restricted stock expense was $7,000 and $15,000 for the year ended December 31, 2011 and for the period between the Acquisition Date and December 31, 2010, respectively.