Note 12. Share-based Compensation

12 Months Ended

Dec. 31, 2013

Notes

Note 12. Share-based Compensation

Note 12.          Share-Based Compensation

IHC and AMIC each have a share-based compensation plan. The following is a summary of the activity pertaining to each of these plans.

A)                IHC Share-Based Compensation Plan

  In June 2006, the stockholders approved the Independence Holding Company 2006 Stock Incentive Plan (the “2006 Plan"). Under the terms of the 2006 Plan, 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 generally three years for employee options. The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. In addition to stock options, the Company has also granted restricted stock units, share appreciation rights (“SARs”) and share-based performance awards under the 2006 Plan. Restricted share units are valued at the quoted market price of the shares at the date of grant and have a three year vesting period. Compensation costs for options and restricted share units are recognized over the stated vesting periods on a straight-line basis. 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. 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. Compensation costs for share-based performance awards are recognized and accrued as performance conditions are met, based on the current share price. IHC discontinued these award programs in 2013.

At December 31, 2013, there were 384,139 shares available for future stock-based compensation grants under IHC’s stock incentive plans. The following table summarizes share-based compensation expense, which is included in selling, general and administrative expenses on the Consolidated Statements of Income, applicable to the IHC plans  by award type for each of the years indicated (in thousands):

		2013		2012		2011
IHC’s Share-based Compensation Plan:
Stock options	$	210	$	237	$	292
Restricted stock units		66		45		27
SARs		698		428		209
Performance awards		(15)		89		45
Share-based compensation expense, pre-tax		959		799		573
Tax benefits		382		319		228
Share-based compensation expense, net	$	577	$	480	$	345

Stock Options

The Company’s stock option activity during 2013 was as follows:

	Shares	Weighted- Average
	Under Option	Exercise Price
December 31, 2012	693,836	$	9.36
Exercised	(47,300)	9.09
Forfeited	(27,500)	9.99
Expired	(2,178)	10.47
December 31, 2013	616,858	$	9.35

No options were granted in 2013, 2012 or 2011. During 2013, the Company received $430,000 in cash from the exercise of stock options with an aggregate intrinsic value of $243,000 and realized $85,000 of tax benefits. In March 2013, 192,500 share options held by 5 employees were modified to extend the expiration term 5 years. The incremental cost of the modified awards was $618,000, which will be recognized over a new 2-year vesting period starting from the date of the modification.

The following table summarizes information regarding outstanding and exercisable options:

		December 31, 2013
		Outstanding		Exercisable
Number of options		616,858		451,858
Weighted average exercise price per share	$	9.35	$	9.12
Aggregate intrinsic value for all options (in thousands)	$	2,556	$	1,978
Weighted average contractual term remaining		1.9 years		1.0 years

As of December 31, 2013, the total unrecognized compensation expense related to non-vested stock options was $320,000, which is expected to be recognized over the remaining requisite weighted average service period of 1.21 years.  

Restricted Stock

The following table summarizes IHC’s restricted stock activity for the year ended December 31, 2013:

	No. of	Weighted-Average
	Non-vested	Grant-Date
	Shares	Fair Value
December 31, 2012	13,200	$	9.37
Granted	7,425		11.66
Vested	(5,775)		9.15
December 31, 2013	14,850	$	10.60

IHC granted 7,425 restricted stock units during years ended December 31, 2013, 2012 and 2011, with weighted-average grant-date fair values of $11.66, $9.39 and $9.84 per share, respectively. The total fair value of restricted stock that vested in 2013, 2012 and 2011 was $69,000, $40,000 and $23,000, respectively.

At December 31, 2013, the total unrecognized compensation cost related to non-vested restricted stock awards was $117,000 which is expected to be recognized as compensation expense over a weighted average period of 1.8 years.

SARs and Share-Based Performance Awards

IHC had 251,800 and 269,950 SAR awards outstanding at December 31, 2013 and 2012, respectively. In 2013, 14,850 SARs were exercised with an aggregate intrinsic value of $74,000 and 3,300 SARs were forfeited. During 2012, the Company granted 56,000 SAR awards, 13,750 SARs were exercised with an aggregate intrinsic value of $33,000 and 2,750 SARs were forfeited.  Included in Other Liabilities in the Company’s Consolidated Balance Sheets at December 31, 2013 and December 31, 2012 are liabilities of $1,307,000 and $683,000, respectively, pertaining to SARs.

In the past, other share-based compensation awards have included performance awards. These programs were discontinued in 2013. The intrinsic value of share-based performance awards paid during the years ended December 31, 2013, 2012 and 2011 was $83,000, $57,000 and $55,000, respectively. Included in the other liabilities on the Company’s Consolidated Balance Sheets at December 31, 2013 and 2012 are liabilities of $0 and $97,000, respectively, pertaining to share-based performance awards.

B)        AMIC Share-Based Compensation Plans

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 was preceded by the 1988 Stock Incentive Plan which expired by its terms in 2008. 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. At December 31, 2013, stock options for 222,285 common stock shares were outstanding, stock options for 207,840 common stock shares were vested, and 6,503,887 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.

The following table summarizes share-based compensation expense, which is included in selling, general and administrative expenses on the Consolidated Statements of Income, applicable to the AMIC share-based compensation plans, by award type for each of the years indicated (in thousands):

		2013		2012		2011
AMIC’s Share-based Compensation Plans:
Stock options	$	42	$	33	$	36
Restricted stock units		-		-		7
Share-based compensation expense, pre-tax		42		33		43
Tax benefits		15		11		15
Share-based compensation expense, net	$	27	$	22	$	28

Stock Options

AMIC’s stock option activity during 2013 was as follows:

	Shares	Weighted- Average
	Under Option	Exercise Price
December 31, 2012	227,285	$	11.40
Granted	13,334		7.01
Expired	(18,334)		7.50
December 31, 2013	222,285	$	11.46

The following table summarizes information regarding AMIC’s outstanding and exercisable options:

		December 31, 2013
		Outstanding		Exercisable
Number of options		222,285		207,840
Weighted average exercise price per share	$	11.46	$	11.79
Aggregate intrinsic value for all options (in thousands)	$	399	$	321
Weighted average contractual term remaining		2.77 years		2.34 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 years ended December 31, 2013 and 2011 was $4.04 and 3.02. No options were granted in 2012. The assumptions set forth in the table below were used to value the stock options granted during the periods:

	2013	2011
Weighted-average risk-free interest rate	2.30%	3.11%
Annual dividend rate per share	-	-
Weighted-average volatility factor of the Company's common stock	45.00%	36.89%
Weighted-average expected term of options	5 years	5 years

No options were exercised during the year ended December 31, 2013 or 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.

As of December 31, 2013, the total unrecognized compensation expense related to AMIC’s non-vested options was $59,000 which will be recognized over the remaining requisite service periods.