NOTE 12 — EQUITY AND SHARE-BASED COMPENSATION

Stock Repurchase Plan

In May 2012, our shareholders approved a stock repurchase program, which replaced the previous stock repurchase program. Under the plan, we are authorized to purchase up to 3.5 million shares of our common stock in the open market in addition to amounts previously purchased under the prior plan. From authorization of the prior plan in May 2010 through March 31, 2013, we have purchased approximately 2.8 million shares of our common stock in the open market at an average price of $41.76 per share. We purchased 0.3 million shares of common stock (at an average price of $82.58 per share) during the three months ended March 31, 2013 and 0.3 million shares of common stock (at an average price of $63.25 per share) during the three months ended March 31, 2012. There are 3.2 million shares of common stock remaining available for repurchase under the plan. Luxembourg law limits share repurchases to approximately the balance of Altisource Portfolio Solutions S.A. (unconsolidated parent company) retained earnings less shares repurchased. At March 31, 2013, approximately $40.0 million was available to repurchase our common stock under Luxembourg law. Our Senior Secured Term Loan agreement also limits our ability to repurchase our common stock, which will limit the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances. As of March 31, 2013, there was no capacity available to repurchase our common stock under our Senior Secured Term Loan agreement.

Share-Based Compensation

We issue share-based awards in the form of stock options for certain employees and officers. We recorded share-based compensation expense of $1.4 million for the three months ended March 31, 2013 and $(0.2) million for the three months ended March 31, 2012. The amount in 2012 includes the reversal of $0.8 million of share-based compensation expense related to the departure of an executive officer in March 2012.

Outstanding share-based compensation currently consists primarily of stock option grants that are a combination of service-based and market-based options.

Service-based Options. These options are granted at fair value on the date of grant. The options generally vest over four years with equal annual cliff-vesting and expire on the earlier of 10 years after the date of grant or following termination of service. A total of 0.9 million service-based awards were outstanding at March 31, 2013.

Market-based Options. These option grants have two components each of which vest only upon the achievement of certain criteria. The first component, which we refer to internally as “ordinary performance” grants, consists of two-thirds of the market-based grant and begins to vest if the stock price realizes a compounded annual gain of at least 20% over the exercise price, as long as the stock price is at least double the exercise price. The remaining third of the market-based options, which we refer to internally as “extraordinary performance” grants, begins to vest if the stock price realizes a compounded annual gain of at least 25% over the exercise price, as long as it is at least triple the exercise price. The vesting schedule for all market-based awards is 25% upon achievement of the criteria and the remaining 75% in three equal annual installments. A total of 2.2 million market-based awards were outstanding at March 31, 2013.

The Company granted less than 0.1 million stock options (at a weighted average exercise price of $88.56 per share) during the three months ended March 31, 2013 and 0.2 million stock options (at a weighted average exercise price of $63.32 per share) during the three months ended March 31, 2012.

The fair value of the service-based options was determined using the Black-Scholes option pricing model, and a lattice (binomial) model was used to determine the fair value of the market-based options, using the following assumptions as of the grant date:

	Three months ended March 31, 2013		Three months ended March 31, 2012
	Black-Scholes	Binomial	Black-Scholes	Binomial

Risk-free interest rate	1.02%–1.13%	0.08%–2.02%	1.16% – 1.17%	0.09% – 2.04%
Expected stock price volatility	36.35%–36.50%	36.40%–36.50%	34.62% – 34.65%	34.50% – 34.60%
Expected dividend yield	—	—	—	—
Expected option life (in years)	6.25	—	6.25	—
Contractual life (in years)	—	14	—	14

Fair value	$31.33–$34.74	$16.12–$30.34	$22.74 – $22.80	$11.65 – $17.27

The following table summarizes the weighted-average fair value of stock options granted, the total intrinsic value of stock options exercised and the fair value of options vested:

	Three months ended March 31,
(in thousands, except per share amounts)	2013		2012
Weighted-average fair value at grant date per share	$	25.22	$	17.23
Intrinsic value of options exercised	918		8,242
Fair value of options vested	838		275

Share-based compensation expense is recorded net of estimated forfeiture rates ranging from 1% to 10%.

As of March 31, 2013, estimated unrecognized compensation costs related to share-based payments amounted to $4.2 million, which we expect to recognize over a weighted-average remaining requisite service period of approximately 2.3 years.

The following table summarizes the activity related to our stock options:

	Number of options		Weighted average exercise price		Weighted average contractual term (in years)	Aggregate intrinsic value (in thousands)

Outstanding at December 31, 2012	3,058,309		$	17.69	6.1	$	211,072
Granted	30,000		88.56
Exercised	(16,450	)	27.73
Forfeited	—		—
Outstanding at March 31, 2013	3,071,859		18.32		5.9	159,433

Exercisable at March 31, 2013	2,261,878		12.20		5.3	130,326

Restricted Shares in AAMC

Prior to the separation of AAMC, certain Altisource employees were granted 0.1 million restricted AAMC shares. The restricted shares will vest in three tranches, subject to the achievement of the following performance hurdles:

· 25% of the grant will vest in accordance with the vesting schedule set forth below if the market value of AAMC common stock meets all three of the following conditions: (i) the market value is at least equal to $250 million; (ii) the market value has realized a compounded annual gain of at least 20% over the market value on the date of the grant; and (iii) the market value is at least double the market value on the date of the grant;

· 50% of the grant will vest in accordance with the vesting schedule set forth below if the market value of AAMC common stock meets all three of the following conditions: (i) the market value is at least equal to $500 million; (ii) the market value has realized a compounded annual gain of at least 22.5% over the market value on the date of the grant; and (iii) the market value is at least triple the market value on the date of the grant; and

· 25% of the grant will vest in accordance with the vesting schedule set forth below if the market value of AAMC common stock meets all three of the following conditions: (i) the market value is at least equal to $750 million; (ii) the market value has realized a compounded annual gain of at least 25% over the market value on the date of the grant; and (iii) the market value is at least quadruple the market value on the date of the grant.

After the performance hurdles for a tranche have been achieved, 25% of the restricted shares in that tranche will vest on each of the first four anniversaries of the date that the performance hurdles for that tranche were met.

If an award recipient’s service with Altisource is terminated prior to full vesting of the restricted shares, then the award recipient will forfeit all unvested restricted shares except that if (i) an award recipient’s service is terminated without cause or due to death or disability and (ii) the performance hurdles for a tranche have already been achieved or are achieved within 90 days of termination, unvested restricted stock for the corresponding tranche will continue to vest according to the above vesting schedule.

Expense related to these restricted shares for the three months ended March 31, 2013 was less than $0.1 million.