Stock Compensation Plans

12 Months Ended

Dec. 31, 2021

13 - Stock Compensation Plans

Equity Incentive Plans

Since 1996, we have maintained an Equity Incentive Plan for Employees. During 2019, we adopted a plan that made a total of 4,500,000 shares of Class A common stock available for issuance to employees of our subsidiaries and affiliates. The plan provides for the granting of awards by our board of directors in the form of stock options, stock appreciation rights, restricted stock or any combination of the above. The plan provides that stock options may become exercisable up to five years from their date of grant, with an option price not less than fair market value on the date preceding the date of grant. We have not granted any stock appreciation rights.

Since 1996, we have maintained an Equity Incentive Plan for Directors. During 2019, we adopted a plan that made 500,000 shares of Class A common stock available for issuance to our directors and the directors of our subsidiaries and affiliates.We may make awards in the form of stock options. The plan also provides for the issuance of 500 shares of restricted stock on the first business day of January in each year to each of our directors and each director of Donegal Mutual who does not serve as one of our directors. We issued 10,000 shares of restricted stock on January 4, 2021 under our director plan. We issued 8,500 shares of restricted stock on January 2, 2020 under our director plan. We issued 8,500 shares of restricted stock on January 2, 2019 under our prior director plan.

No further shares are available for future option grants for plans in effect prior to 2019.

We measure all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and record such expense in our results of operations. In determining the expense we record for stock options granted to directors and employees of our subsidiaries and affiliates, we estimate the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The significant assumptions we utilize in applying the Black-Scholes option pricing model are the risk-free interest rate, expected term, dividend yield and expected volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected term used as the assumption in the model. We base the expected term of an option award on our historical experience for similar awards. We determine the dividend yield by dividing the per share dividend by the grant date stock price. We base the expected volatility on the volatility of our stock price over a historical period comparable to the expected term.

The weighted-average grant date fair value of options we granted during 2021 was $1.21. We calculated this fair value based upon a risk-free interest rate of 0.91%, an expected life of three years, an expected volatility of 20% and an expected dividend yield of 4%.

The weighted-average grant date fair value of options we granted during 2020 was $1.15. We calculated this fair value based upon a risk-free interest rate of 0.20%, an expected life of three years, an expected volatility of 20% and an expected dividend yield of 4%.

The weighted-average grant date fair value of options we granted during 2019 was $1.15. We calculated this fair value based upon a risk-free interest rate of 1.64%, an expected life of three years, an expected volatility of 17% and an expected dividend yield of 4%.

We charged compensation expense for our stock compensation plans against income before income taxes of $965,701, $1.1 million and $1.4 million for the years ended December 31, 2021, 2020 and 2019, respectively, with a corresponding income tax benefit of $202,797, $229,698 and $288,901. At December 31, 2021 and 2020, our total unrecognized compensation cost related to non-vested share-based compensation granted under our stock compensation plans was $1.5 million and $1.6 million, respectively. We expect to recognize this cost over a weighted average period of 1.9 years.

During 2021, we received cash from option exercises under all stock compensation plans of $12.3 million. We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of $438,850 for 2021. During 2020, we received cash from option exercises under all stock compensation plans of $17.5 million. We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of $302,901 for 2020. During 2019, we received cash from option exercises under all stock compensation plans of $2.9 million. We realized actual tax benefits for the tax deductions from option exercises of share-based compensation of $64,765 for 2019.

Information regarding activity in our stock option plans follows:

	Number of Options			Weighted-Average Exercise Price Per Share
Outstanding at December 31, 2018		10,024,862		$	15.09
Granted - 2019		1,045,400			14.97
Exercised - 2019		(217,498	)		13.23
Forfeited - 2019		(416,774	)		15.88
Outstanding at December 31, 2019		10,435,990			15.09
Granted - 2020		935,099			14.45
Exercised - 2020		(1,294,606	)		13.52
Forfeited - 2020		(303,908	)		15.23
Expired - 2020		(78,223	)	$	13.64
Outstanding at December 31, 2020		9,694,352		$	15.24
Granted - 2021		906,500			14.39
Exercised - 2021		(946,646	)		13.00
Forfeited - 2021		(404,664	)		15.69
Expired - 2021		(1,139,816	)	$	16.40
Outstanding at December 31, 2021		8,109,726		$	15.22
Exercisable at:
December 31, 2019		8,449,389		$	15.13
December 31, 2020		7,786,934		$	15.42
December 31, 2021		6,297,849		$	15.43

Shares available for future option grants at December 31, 2021 totaled 2.2 million shares under all plans.

The following table summarizes information about stock options outstanding at December 31, 2021:

Grant Date	Exercise Price		Number of Options Outstanding		Weighted-Average Remaining Contractual Life	Number of Options Exercisable
December 20, 2012		14.50		874,014	1.0 years		874,014
December 19, 2013		15.90		1,784,970	2.0 years		1,784,970
December 18, 2014		15.80		1,116,965	3.0 years		1,116,965
December 21, 2017		17.60		735,700	1.0 years		735,700
December 20, 2018		13.69		824,877	2.0 years		824,877
March 4, 2019		13.51		10,000	2.2 years		10,000
December 19, 2019		14.98		986,100	3.0 years		657,393
December 17, 2020		14.43		871,800	4.0 years		290,597
January 4, 2021		14.07		10,000	4.0 years		3,333
December 16, 2021		14.39		895,300	5.0 years		—
	Total			8,109,726			6,297,849

Employee Stock Purchase Plan

Since 1996, we have maintained an Employee Stock Purchase Plan. During 2011, we adopted a plan that made 300,000 shares of our Class A common stock available for issuance, which we amended in 2019 to make 500,000 shares of our Class A common stock available for issuance. The 2011 plan expired during 2021. During 2021, we adopted a new plan that made 500,000 shares of our Class A common stock available for issuance and extends over a 10-year period. The plan provides for shares to be offered to all eligible employees at a purchase price equal to the lesser of 85%of the fair market value of our Class A common stock on the last day before the first day of each enrollment period (June 1 and December 1 of each year) under the plan or 85% of the fair market value of our Class A common stock on the last day of each subscription period (June 30 and December 31 of each year).

A summary of plan activity follows:

	Shares Issued
	Price		Shares
January 1, 2019		11.60		24,834
July 1, 2019		12.24		22,926
January 1, 2020		12.28		20,424
July 1, 2020		12.09		22,662
January 1, 2021		11.96		23,336
July 1, 2021		11.88		24,619

On January 1, 2022, we issued 24,907 shares at a price of $12.15 per share under this plan.

Agency Stock Purchase Plan

Since 1996, we have maintained an Agency Stock Purchase Plan. During 2018, we adopted a plan that made 350,000 shares of our Class A common stock available for issuance to agents of our insurance subsidiaries and Donegal Mutual. During 2021, we amended the 2018 plan to make 400,000 shares of our Class A common stock available for issuance. The 2018 plan expired in 2021. During 2021, we adopted a new plan that made 500,000 shares of our Class A common stock available for issuance to agents of our insurance subsidiaries and Donegal Mutual. The plan permits an agent to invest up to $12,000 per subscription period (April 1 to September 30 and October 1 to March 31 of each year) under various methods. We issue stock at the end of each subscription period at a price equal to 90% of the average market price during the last ten trading days of each subscription period. During 2021, 2020 and 2019, we issued 99,828, 101,647 and 110,836 shares, respectively, under this plan. The expense we recognized under this plan was not material.