NOTE S – STOCK BASED COMPENSATION

We grant stock-based compensation in the form of (1) unrestricted stock awards to our outside directors and (2) restricted stock units (“RSUs”) to key executive personnel. These awards are granted under the International Shipholding Corporation 2011 Stock Incentive Plan (the “Plan”), which was approved by our stockholders in 2011.

Unrestricted Stock Awards

On January 15, 2013, we granted our outside directors an aggregate of 6,708 unrestricted shares of common stock from the Plan. On January 14, 2014, we granted our outside directors an aggregate of 4,470 unrestricted shares of common stock from the Plan. On January 15, 2015, we granted our outside directors an aggregate of 8,100 unrestricted shares of common stock from the Plan.

For the years ended December 31, 2014, 2013, and 2012, our income before taxes and net income reflected $120,000, $120,000, and $420,000, and $120,000, $78,000, and $420,000, respectively, of stock-based compensation expenses, exclusive of expense related to the RSUs discussed below, which reduced both basic and diluted earnings by $0.02 per share for the year ended 2014.

A summary of the activity for stock awards during the year ended December 31, 2014 and 2013 are as follows:



	2014		2013
	Shares	Weighted Average Fair Value Per Share	Shares	Weighted Average Fair Value Per Share
Non-vested - December 31,	-	$ -	-	$ -
Unrestricted Shares Granted	4,470	$ 26.80	6,708	$ 17.89
Shares Vested	(4,470)	$ 26.80	(6,708)	$ 17.89
Shares Forfeited	-	-	-	-
Non-vested - December 31,	-	$ -	-	$ -

Restricted Stock Units

General Terms

We grant restricted stock units to key executive personnel under the Plan. Each year, we have granted awards that vest based on continued service (“Time-Based RSUs”) as well as awards that vest based on a combination of performance metrics and continued service (“Performance-Based RSUs”). Subject to certain exceptions, our Time-Based RSUs generally vest one-third per year over a three-year period. Each of our Performance-Based RSUs represents the right to receive a maximum of one-and-a-half shares of common stock, depending upon performance. We grant two types of Performance-Based RSUs – one for which vesting is contingent upon an absolute metric, our earnings per share (our “Absolute Performance-Based RSUs”), and another for which vesting is contingent upon our performance as measured against a relative metric, our relative total shareholder return (our “Relative Performance-Based RSUs”).

For our top four executives, their Absolute Performance-Based RSUs vest and pay out in the year following the grant. For each other recipient, the Absolute Performance-Based RSUs vest and pay out one-third per year over the three years following grant, based on the achievement of the metric in the first year. With respect to the Relative Performance-Based RSUs, vesting is contingent upon our total stockholder return for a given period as compared to the companies comprising the Russell 2000 index for the same period. For our top four executives, the performance of their Relative Performance-Based RSUs is measured over a one-year period (the calendar year of the grant), while for each other recipient the performance of their Relative Performance-Based RSUs is measured at the end of the third year (through December 31 of the third year following the grant). For all RSUs, vesting is contingent upon continued employment with the Company except in certain limited circumstances.

For the years ended December 31, 2014, 2013, and 2012, our net income reflected approximately $1.4 million, $1.3 million, and $797,000, respectively, of RSU stock-based compensation expenses, which reduced both basic and diluted earnings by $0.19 per share for the year 2014.

2012 Grants

With respect to RSUs granted in 2012, we achieved maximum performance on our Absolute Performance-Based RSUs, and 21,564 shares of common stock vested and were paid out in 2013. In May 2014, an additional 1,500 shares vested and were paid out. The remaining 1,500 RSUs are scheduled to vest and pay out in May 2015. With respect to our Relative Performance-Based RSUs, for our top four executives, whose awards were measured over a one-year performance period, our relative rank was in the 27th percentile, and therefore those awards paid out at 53% of grant (21,564 shares of common stock) in 2013. Vesting of the remainder of Relative Performance-Based RSUs granted in 2012 was based on our relative TSR rank over a three-year measurement period, however we did not meet the minimum threshold and therefore the remaining 1,500 shares subject to those RSUs will be forfeited in 2015.

2013 Grants

With respect to RSUs granted in 2013, we achieved maximum performance on our Absolute Performance-Based RSUs, and 8,450 shares of common stock vested and paid out on May 7, 2014. The remaining 3,525 RSUs are scheduled to vest and pay out ratably in May 2015 and 2016. With respect to our Relative Performance-Based RSUs, for our top four executives, whose awards were measured over a one-year performance period, our relative rank was in the 79th percentile, and therefore those awards paid out at 150% of grant (20,064 shares of common stock) on May 7, 2014. The remainder of Relative Performance-Based RSUs granted in 2013 will vest based on our relative TSR rank over a three-year measurement period, and therefore those 3,525 RSUs are scheduled to vest and be paid out in 2016 based on our relative performance as determined following the end of the performance period (December 31, 2015).

2014 Grants

In 2014, we granted 7,950 Time-Based RSUs, 17,351 Absolute Performance-Based RSUs, and 17,349 Relative Performance-Based RSUs. The Time-Based RSUs will vest equally over three years. With respect to our Relative Performance-Based RSU’s for our top four executives, whose awards were measured over a one year period, our relative rank was in the 10th percentile and therefore all 13,374 shares subject to those RSUs were forfeited. The remainder of Relative Performance-Based RSUs granted in 2014 will vest based on our relative TSR rank over a three-year measurement period and therefore those 3,975 shares subject to those RSUs are scheduled to vest and are to be paid out in 2017 based on our relative performance as determined following the end of the performance period (December 31, 2016).

Fair Values

The fair value of the Time-Based RSUs was calculated based on the closing market price of our stock as of the grant date times the number of RSUs issued with no forfeitures assumed. For our 2014, 2013, and 2012 awards, we used the closing market price of our stock on January 28, 2014, April 23, 2013, and May 7, 2012 which was $25.95, $17.66, and $19.35 per share, respectively. The Performance-Based RSUs are subject to vesting upon two different performance metrics: an Absolute Performance-Based metric based on targeted earnings per share and a Relative Performance-Based metric based on our total stockholder return over a given period as measured against that of the other companies in the Russell 2000 index. In order to calculate the fair value of our Absolute Performance-Based RSUs, we multiplied the closing market price of our stock as of the grant date times the number of RSUs issued with no forfeitures assumed. We measured our Relative Performance-Based RSUs based on market conditions on the grant date. In order to derive the fair value of these awards, we used a Monte-Carlo simulation statistical technique to simulate our future stock prices and the components of the Russell 2000 Index. The stock prices were based upon the risk-free rate of return, the volatility of each entity, and the correlation of each entity with the Russell 2000 Index. We multiplied our ending simulated stock price by the payout percentage to determine a projected payout at the end of the performance period. The ending payout was then discounted, using the risk-free rate of return, to the grant date to determine the grant date fair value. Since 2014, 2013, and 2012 all provide for one year vesting (for the top four named executive officers) and three year vesting (for all other award recipients), a fair value was calculated separately for the one and three year awards for each year.



	2014 Awards						2013 Awards						2012 Awards
	1 Year Vest			3 Year Vest			1 Year Vest			3 Year Vest			1 Year Vest			3 Year Vest
Stock Price	$	25.95		$	25.95		$	17.66		$	17.66		$	19.35		$	19.35
Expected Volatilities		44.30	%		40.02	%		33.50	%		37.03	%		44.31	%		40.50	%
Correlation Coefficients		0.374			0.554			0.473			0.625			0.719			0.694
Risk Free Rate		0.10	%		0.72	%		0.10	%		0.31	%		0.16	%		0.34	%
Dividend Yield		3.85	%		3.85	%		5.70	%		5.70	%		5.17	%		5.17	%
Simulated Fair Value	$	23.03		$	25.46		$	15.33		$	16.57		$	17.73		$	18.88
Fair Value as a % of Grant		88.74	%		98.10	%		86.81	%		93.83	%		91.63	%		97.57	%

Our operating results, net income and net income before taxes for the periods set forth below include (i) the following amounts of compensation expense associated with the stock grants and RSUs and (ii) the related reductions in earnings per share:



	Years Ended December 31,
(All Amounts in Thousands)		2014		2013
Stock-Based Compensation
Expense:
Stock Grants to Directors & Officers	$	120	$	120
RSUs Awards to Officers	$	1,416	$	1,299
Related Reduction in
Earnings Per Share 1	$	(0.14)	$	(0.13)

1 Same for basic and diluted earnings per share

A summary of the activity for the restricted stock unit awards during the year ended December 31, 2014 is as follows:



	Number of RSU's		Weighted Average Grant Date Fair Value
Non-vested - December 31, 2013	131,100	$	18.77
Additional Awards Granted	15,138		16.63
Awards Granted	42,650		24.99
Awards Exercised	(48,849)		24.97
Awards Cancelled	(25,639)		24.97
Non-vested - December 31, 2014	114,400	$	22.07

Due to meeting the maximum performance level for the 2013 Absolute Performance-Based RSUs, an additional 15,138 shares were awarded. For the top four executives, the 2013 Relative Performance-Based RSUs met the performance level threshold, which resulted in the RSUs vesting and paying out at 150%. During 2014 we retired a combined total of 25,639 shares of common stock, in order to meet the minimum tax liabilities associated with the vesting of equity awards held by our executive officers.