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Note 14. Share-based Compensation
 12 Months Ended
Dec. 31, 2016
Notes  
Note 14. Share-based Compensation

Note 14.          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 November 2016, the stockholders approved the Independence Holding Company 2016 Stock Incentive Plan (the “2016 Plan"). The 2016 Plan permits grants of options, SARs, restricted shares, restricted share units, unrestricted shares, deferred share units and performance awards. Under the terms of the 2016 Plan: (i) the exercise price of an option may not be less than the fair market value of an IHC share on the grant date and the terms of an option may not exceed 10 years from the grant date; and (ii) the exercise price of a SAR may not be less than the fair market value of an IHC share on the grant date and SAR terms may not exceed 10 years from the date of grant.

 

The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. In general, the vesting period for an option grant is three years. Restricted share units are valued at the quoted market price of the shares at the date of grant and generally vest over three years. Compensation costs for options and restricted share units are recognized over the stated vesting periods on a straight-line basis. The fair value of a SAR 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 the fair value of a SAR continue to be recognized as compensation expense in the period of the change until settlement.

 

 

At December 31, 2016, there were 1,133,100 shares available for future stock-based compensation grants under the 2016 Plan. 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):

 

 

 

 

 

2016

 

2015

 

2014

IHC’s Share-based Compensation Plan:

 

 

 

 

 

 

 

Stock options

 

$

          181 

$

             55 

$

          669 

Restricted stock units

 

 

             83 

 

             89 

 

             85 

SARs

 

 

          435 

 

             13 

 

             14 

 

 

 

 

 

 

 

 

Share-based compensation expense, pre-tax

 

 

          699 

 

          157 

 

          768 

Tax benefits

 

 

          279 

 

             63 

 

          306 

 

 

 

 

 

 

 

 

Share-based compensation expense, net

 

$

          420 

$

             94 

$

          462 

 

Stock Options

 

The Company’s stock option activity during 2016 was as follows:

 

 

 

Shares

 

Weighted- Average

 

 

Under Option

 

Exercise Price

 

 

 

 

 

December 31, 2015

 

                584,080 

 

$

                9.35

Granted

 

                157,000 

 

 

              19.95

Exercised

 

                 (43,900)

 

 

                9.09

December 31, 2016

 

                697,180 

 

$

              11.75

 

The weighted average grant-date fair-value of options granted during the year ended December 31, 2016 was $2.65. No options were granted in 2015 or 2014. The assumptions set forth in the table below were used to value the stock options granted during the period indicated:

 

 

 

2016

 

 

 

Weighted-average risk-free interest rate

 

     1.87%

Expected annual dividend rate per share

 

     0.60%

Expected volatility factor of the Company's common stock

 

   12.95%

Weighted-average expected term of options

 

4.5 years

 

In 2016, option agreements affecting 13 employees were modified to extend the expirations of their terms from 2017 to 2019 and as a result, the Company recorded incremental compensation costs of $170,000. In 2016, IHC received $399,000 in cash from the exercise of stock options with an aggregate intrinsic value of $416,000 and realized $104,000 of tax benefits. In 2015, IHC received $278,000 in cash from the exercise of stock options with an aggregate intrinsic value of $132,000 and realized $22,000 of tax benefits. In May 2014, option agreements affecting 15 employees were modified to extend the expirations of their terms from 2015 to 2017 and as a result, the Company recorded incremental compensation costs of $405,000.

 

The following table summarizes information regarding options outstanding and exercisable:

 

 

 

 

December 31, 2016

 

 

Outstanding

 

Exercisable

 

 

 

 

 

Number of options

 

697,180

 

540,180

Weighted average exercise price per share

$

11.75

$

9.37

Aggregate intrinsic value for all options (in thousands)

$

5,501

$

5,501

Weighted average contractual term remaining

 

2.5 years

 

1.8 years

 

 

At December 31, 2016, the total unrecognized compensation cost related to IHC’s non-vested stock options was $404,000 and it is expected to be recognized as compensation expense over a weighted average period of 2.9 years.

 

Restricted Stock

 

The following table summarizes IHC’s restricted stock activity for the year ended December 31, 2016:

 

 

 

 

No. of

 

Weighted-Average

 

 

Non-vested

 

   Grant-Date

 

 

Shares

 

Fair Value

 

 

 

 

 

December 31, 2015

 

             14,850 

 

$

12.26

 

Granted

 

               9,900 

 

 

19.15

 

Vested

 

             (7,425)

 

 

12.24

 

 

 

 

 

 

 

 

December 31, 2016

 

             17,325 

 

$

16.20

 

 

 

IHC granted 9,900, 7,425 and 7,425 of restricted stock units during each of the years ended December 31, 2016, 2015 and 2014, respectively, with weighted-average grant-date fair values of $19.15, $11.78 and $13.27 per share, respectively. The total fair value of restricted stock units that vested in 2016, 2015 and 2014 was $120,000, $89,000 and $103,000, respectively.

 

At December 31, 2016, the total unrecognized compensation cost related to non-vested restricted stock unit awards was $235,000 which is expected to be recognized as compensation expense over a weighted average period of 2.1 years.

 

SARs and Share-Based Performance Awards

 

IHC had 71,500 and 125,850 SAR awards outstanding at December 31, 2016 and 2015, respectively. In 2016, 54,350 SARs were exercised with an aggregate intrinsic value of $449,000. In 2015, 11,000 SARs were exercised with an aggregate intrinsic value of $61,000. In 2014, 112,200 SARs were exercised with an aggregate intrinsic value of $529,000; and 2,750 SARs were forfeited. Included in Other Liabilities in the Company’s Consolidated Balance Sheets at December 31, 2016 and December 31, 2015 are liabilities of $876,000 and $743,000, respectively, pertaining to SARs.

 

(B)     AMIC Share-Based Compensation Plans

 

 

As a result of a short-form merger discussed in Note 1 (B), AMIC’s 2009 Stock Incentive Plan (“AMIC 2009 Plan”) was terminated. Under the terms of the AMIC 2009 Plan, prior to its termination, option exercise prices were equal to the quoted market price of the shares at the date of grant; option terms were a maximum of ten years; and vesting periods generally ranged from three to four years. The fair value of an option award was estimated on the date of grant using the Black-Scholes option valuation model.

 

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

 

 

 

 

 

2016

 

2015

 

2014

AMIC’s Share-based Compensation Plans:

 

 

 

 

 

 

 

Stock options

 

$

             21 

$

             43 

$

          52 

 

 

 

 

 

 

 

 

Share-based compensation expense, pre-tax

 

 

             21 

 

             43 

 

          52 

Tax benefits

 

 

               7 

 

             15 

 

          18 

 

 

 

 

 

 

 

 

Share-based compensation expense, net

 

$

             14 

$

             28 

$

          34 

 

 

Stock Options

 

AMIC’s stock option activity during 2016 was as follows:

 

 

 

 

Shares

 

Weighted- Average

 

 

Under Option

 

Exercise Price

 

 

 

 

 

December 31, 2015

 

                  71,558 

 

$

                      8.88

Exercised

 

                 (30,446)

 

 

                      8.62

Cancelled

 

                 (41,112)

 

 

                      9.07

December 31, 2016

 

                              - 

 

$

                             -

 

No options were granted in 2016 or 2015. The weighted average grant-date fair-value of options granted during the year ended December 31, 2014 was $5.70. The assumptions set forth in the table below were used to value the stock options granted during the period indicated:

 

 

 

 

2014

 

 

 

Weighted-average risk-free interest rate

 

2.72%

Annual dividend rate per share

 

-

Weighted-average volatility factor of the Company's common stock

 

38.27%

Weighted-average expected term of options

 

5 years

 

 

In 2016, AMIC received $262,000 in cash from the exercise of stock options with an aggregate intrinsic value of $212,000. In connection with the short-form merger transaction discussed in Note 1 (B), option agreements affecting 7 employees and directors were cancelled and as a result, the Company recorded incremental compensation costs of $646,000. These costs were accounted for as part of the equity transaction to take AMIC private. During 2015 and 2014, AMIC received $52,000 and $33,000 in cash from the exercise of stock options with aggregate intrinsic values of $37,000 and $38,000.