13. Share-based Payment Arrangements:

Our 2005 Long Term Incentive Plan (“2005 LTIP”) is a stock compensation plan for key employees and non-employee directors that was initially approved by the shareholders on May 26, 2005. There are 2,000,000 shares authorized for issuance under the 2005 LTIP. As of December 31, 2014, there were outstanding incentive stock options to purchase 757,977 shares of our common stock, non-qualified stock options to purchase 304,157 shares of our common stock and restricted stock units representing the right to receive up to 427,824 shares of our common stock. There are 358,850 shares reserved for future issuance under the 2005 LTIP. The exercise price of all such outstanding stock options is equal to the fair market value of our common stock on the date of grant.

Stock Options:

Incentive stock options granted under the 2005 LTIP prior to 2009 vest 10%, 20%, 30% and 40% on the first, second, third and fourth anniversary dates of the grant, respectively, and terminate five to ten years from the date of grant. Incentive stock options granted in 2009 and one grant of 5,000 incentive stock options in 2011 vest in equal annual increments on each of the first seven anniversary dates and terminate ten years from the date of grant. One grant of 25,000 incentive stock options in 2010 vests in equal annual increments on each of the first three anniversary dates and terminates ten years from the date of grant. Non-qualified stock options granted under the 2005 LTIP generally vest 100% six months after the date of grant and terminate ten years from the date of grant. One grant of 200,000 non-qualified stock options in 2009 vests in equal annual increments on each of the first seven anniversary dates and terminates ten years from the date of grant.

A summary of the status of our stock options as of December 31, 2014 and changes during the year then ended is presented below:




	Number of Shares		Weighted Average Exercise Price		Remaining Contractual Term (Years)		Aggregate Instrinsic Value ($000)
Outstanding at January 1, 2014		1,387,489	$	9.66
Granted		-
Exercised		(135,359)	$	8.53
Forfeited or expired		(189,996)	$	11.29
Outstanding at December 31, 2014		1,062,134	$	9.51		3.3	$	2,877
Exercisable at December 31, 2014		948,561	$	9.85		3.2	$	2,260

The following table details the intrinsic value of options exercised, total cost of share-based payments charged against income before income tax benefit and the amount of related income tax benefit recognized in income for the periods indicated (in thousands):



	2014		2013		2012
Intrinsic value of options exercised	$	412	$	-	$	-
Cost of share-based payments (non-cash)	$	173	$	207	$	380
Income tax benefit of share-based payments recognized in income	$	30	$	30	$	38

As of December 31, 2014, there was $0.2 million of total unrecognized compensation cost related to non-vested stock options granted under our plans, of which $0.2 million is expected to be recognized in 2015, $44 thousand is expected to be recognized in 2016 and $3 thousand is expected to be recognized in 2017.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on the historical volatility of Hallmark’s and similar companies’ common stock for a period equal to the expected

term. The risk-free interest rates for periods within the contractual term of the options are based on rates for U.S. Treasury Notes with maturity dates corresponding to the options’ expected lives on the dates of grant. Expected term is determined based on the simplified method as we do not have sufficient historical exercise data to provide a basis for estimating the expected term. There were no stock options granted in 2014, 2013 or 2012.

Restricted Stock Units:

The 2005 LTIP was amended by the stockholders on May 30, 2013 to authorize the grant of restricted stock units, in addition to the other types of awards available thereunder. Restricted stock units represent the right to receive shares of common stock upon the satisfaction of vesting requirements, performance criteria and other terms and conditions. On July 27, 2012 and April 10, 2013, an aggregate of 129,463 and 122,823 restricted stock units, respectively, were conditionally granted to certain employees of the Company subject to shareholder approval of the amendments to the 2005 LTIP at the May 30, 2013 shareholder meeting. One conditional grant of 9,280 restricted stock units was forfeited prior to approval at the shareholder meeting. Subsequently on September 8, 2014, an aggregate of 175,983 restricted stock units were granted to certain employees.

The performance criteria for all restricted stock units require that the Company achieve certain compound average annual growth rates in book value per share over the vesting period in order to receive shares of common stock in amounts ranging from 50% to 150% of the number of restricted stock units granted. In addition, certain restricted stock units contain an additional performance criteria related to the attainment of an average combined ratio percentage over the vesting period. If and to the extent specified performance criteria have been achieved, the restricted stock units granted on July 27, 2012 will vest on March 31, 2015, the restricted stock units granted on April 10, 2013 vest on March 31, 2016, the restricted stock units granted on September 8, 2014 (except for one grant) vest on March 31, 2017 and one grant of restricted stock units granted on September 8, 2014 vests on March 31, 2018. Grantees of restricted stock units do not have any rights of a stockholder of the Company, and do not participate in any distributions to common stockholders of the Company, until the award fully vests upon satisfaction of the vesting schedule, performance criteria and other conditions set forth in the agreement. Therefore, the unvested restricted stock units do not contain nonforfeitable rights to dividend equivalent payments and are not considered participating securities for the purposes of ASC 260, “Earnings Per Share.”

Compensation cost is measured as an amount equal to the fair value of the restricted stock units and is expensed over the vesting period if achievement of the performance criteria is deemed probable, with the amount of the expense recognized based on the Company’s best estimate of the ultimate achievement level. The grant date fair value of the restricted stock units granted in 2012 and 2013 is $9.20 per unit. The grant date fair value of the restricted stock units granted in 2014 is $9.66 per unit. The Company incurred compensation expense of $49 thousand and $145 thousand related to the restricted stock units during the year ended December 31, 2014 and 2013, respectively. The Company recorded an income tax benefit of $17 thousand and $51 thousand related to the restricted stock units during the year ended December 31, 2014 and 2013, respectively.

A summary of the status of our restricted stock units as of December 31, 2014 and changes during the year then ended is presented below:



		Number of Restricted Stock Units
Nonvested at January 1, 2014		236,851
Granted		175,983
Vested		-
Forfeited		(127,618)
Nonvested at December 31, 2014		285,216

As of December 31, 2014, there was $0.9 million of total unrecognized compensation cost related to non-vested restricted stock units granted under our 2005 LTIP, of which $0.4 million is expected to be recognized in 2015, $0.3 million is expected to be recognized in 2016, $0.2 million is expected to be recognized in 2017 and $32 thousand is expected to be recognized in 2018.