Note K: Stock-Based Compensation

The Ryland Group, Inc. 2011 Equity and Incentive Plan (the "Plan") permits the granting of stock options, restricted stock awards, stock units, cash incentive awards or any combination of the foregoing to employees. Stock options granted in accordance with the Plan generally have a maximum term of seven years and vest in equal annual installments over three years. Certain outstanding stock options granted under predecessor plans have maximum terms of either five or ten years. Outstanding restricted stock units granted under the Plan or its predecessor plans generally vest in three equal annual installments and those granted to senior executives generally vest in one installment at the end of a three-year performance period. At December 31, 2014 and 2013, stock options or other awards or units available for grant under the Plan or its predecessor plans totaled 3,515,345 and 3,303,855, respectively.

The Ryland Group, Inc. 2011 Non-Employee Director Stock Plan (the "Director Plan") provides for a stock award of 3,000 shares to each non-employee director on May 1 of each year. New non-employee directors will receive a pro rata stock award within 30 days after their date of appointment or election, based on the remaining portion of the plan year in which they are appointed or elected. Stock awards are fully vested and nonforfeitable on their applicable award dates. There were 117,830 and 138,830 stock awards available for future grant in accordance with the Director Plan at December 31, 2014 and December 31, 2013, respectively. Previously, The Ryland Group, Inc. 2004 Non-Employee Director Equity Plan and its predecessor plans provided for automatic grants of nonstatutory stock options to directors. These stock options are fully vested and have a maximum term of ten years.

All outstanding stock options, stock awards and restricted stock awards have been granted in accordance with the terms of the applicable Plan, Director Plan and their respective predecessor plans, all of which were approved by the Company's stockholders. Certain option and share awards provide for accelerated vesting if there is a change in control or upon retirement (as defined in the plans).

The Company recorded stock-based compensation expense of $18.6 million, $19.5 million and $17.8 million for the year ended December 31, 2014, 2013 and 2012, respectively. Stock-based compensation expenses have been allocated to the Company's segments and included in "Selling, general and administrative" and "Financial services" expenses within the Consolidated Statements of Earnings.

ASC 718 requires cash flows attributable to tax benefits resulting from tax deductions in excess of compensation costs recognized for exercised stock options ("excess tax benefits") to be classified as financing cash flows. For the year ended December 31, 2014, $5.9 million in excess tax benefits was recognized, compared to no excess tax benefits recognized for the years ended December 31, 2013 and 2012.

A summary of stock option activity in accordance with the Company's equity incentive plans as of December 31, 2014, 2013 and 2012, and changes for the years then ended, follows:

	SHARES			WEIGHTED- AVERAGE EXERCISE PRICE	AVERAGE REMAINING CONTRACTUAL LIFE (in years)		AGGREGATE INTRINSIC VALUE (in thousands)

Options outstanding at January 1, 2012	3,948,874		$	28.91	2.4
Granted	756,000			18.55
Exercised	(568,293	)		18.89
Forfeited	(717,158	)		35.38

Options outstanding at December 31, 2012	3,419,423		$	26.92	2.9	$	42,992
Available for future grant	3,016,108

Total shares reserved at December 31, 2012	6,435,531

Options exercisable at December 31, 2012	1,967,786		$	33.10	1.6	$	16,939

Options outstanding at January 1, 2013	3,419,423		$	26.92	2.9
Granted	–			–
Exercised	(863,933	)		24.55
Forfeited	(229,289	)		34.88

Options outstanding at December 31, 2013	2,326,201		$	27.02	2.3	$	44,123
Available for future grant	3,303,855

Total shares reserved at December 31, 2013	5,630,056

Options exercisable at December 31, 2013	1,650,893		$	30.74	1.6	$	26,908

Options outstanding at January 1, 2014	2,326,201		$	27.02	2.3
Granted	–			–
Exercised	(758,231	)		27.18
Forfeited	(182,473	)		54.58

Options outstanding at December 31, 2014	1,385,497		$	23.30	2.2	$	25,168
Available for future grant	3,515,345

Total shares reserved at December 31, 2014	4,900,842

Options exercisable at December 31, 2014	1,172,500		$	24.16	1.9	$	20,917

A summary of stock options outstanding and exercisable at December 31, 2014, follows:

	OPTIONS OUTSTANDING					OPTIONS EXERCISABLE
RANGE OF EXERCISE PRICES		NUMBER OUTSTANDING	WEIGHTED- AVERAGE REMAINING LIFE (in years)		WEIGHTED- AVERAGE EXERCISE PRICE		NUMBER EXERCISABLE		WEIGHTED- AVERAGE EXERCISE PRICE

$16.52 to $18.05		473,334	1.2	$	16.53		470,001	$	16.52
$18.22 to $22.78		553,997	4.1		18.26		351,000		18.28
$23.27 to $72.13		358,166	0.7		40.05		351,499		40.23

The intrinsic values of stock options exercised during the years ended December 31, 2014, 2013 and 2012, totaled $11.2 million, $15.3 million and $5.4 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.

The Company has determined the grant-date fair value of stock options using the Black-Scholes-Merton option-pricing model. Expected volatility is based upon the historical volatility of the Company's common stock. The expected dividend yield is based on an annual dividend rate of $0.12 per common share. The risk-free rate for periods within the contractual life of the stock option award is based upon the zero-coupon U.S. Treasury bond on the date the stock option is granted, with a maturity equal to the expected option life of the stock option granted. The expected option life is derived from historical experience under the Company's share-based payment plans and represents the period of time that a stock option award granted is expected to be outstanding.

There were no stock options granted during the years ended December 31, 2014 and December 31, 2013. The weighted-average grant-date fair value of stock options granted during 2012 was $7.21. The following assumptions were used to determine the grant-date fair value of those options: an expected volatility of 49.3 percent; an expected dividend yield of 0.7 percent; an expected term of 4.5 years; and a risk-free rate of 0.8 percent.

Pursuant to the Plan, on March 1, 2012, the Company awarded 275,000 stock options to senior executive officers. Effective October 1, 2012, the Company established the 2012 Amended Executive Officer Non-Qualified Stock Option Agreement, which amended the previous grants made to senior executive officers in 2012. In order to encourage a significant level of appreciation in stockholder value, this agreement added a condition to the exercisability of stock options, which requires that the stock option may only be exercised if and when the Company's stock price is greater than or equal to 150 percent of the grant price. In accordance with ASC 718, the Company used a Black-Scholes-Merton option-pricing model to calculate the incremental expense resulting from the modification of the performance stock options. Expected volatility is based upon the historical volatility of the Company's common stock. The expected dividend yield is based on an annual dividend rate of $0.12 per common share. The zero coupon rate of interest is derived from the observable Treasury rates. The expected option life is derived using a Monte Carlo simulation methodology to model the expected exercise and termination behavior of optionees. This incremental expense, plus the grant-date fair value, will be recognized over the requisite service period in stock-based compensation expense.

Stock-based compensation expense related to employee stock options totaled $2.0 million, $3.5 million and $5.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.

A summary of the Company's nonvested options as of and for the years ended December 31, 2014, 2013 and 2012, follows:

	2014					2013					2012
		SHARES			WEIGHTED- AVERAGE GRANT-DATE FAIR VALUE		SHARES			WEIGHTED- AVERAGE GRANT-DATE FAIR VALUE		SHARES			WEIGHTED- AVERAGE GRANT-DATE FAIR VALUE

Nonvested options outstanding at January 1		675,308		$	6.84		1,451,637		$	7.08		1,374,628		$	7.00
Granted		–			–		–			–		756,000			7.21
Vested		(444,646	)		6.64		(697,667	)		7.35		(611,659	)		7.03
Forfeited		(17,665	)		7.07		(78,662	)		6.78		(67,332	)		7.47

Nonvested options outstanding at December 31		212,997		$	7.23		675,308		$	6.84		1,451,637		$	7.08

At December 31, 2014, the total unrecognized compensation cost related to nonvested stock option awards previously granted under the Company's plans was $329,000. That entire cost is expected to be recognized in 2015.

Compensation expense associated with restricted stock unit awards and LTIP awards to senior executives totaled $15.8 million, $15.1 million and $12.4 million for the years ended December 31, 2014, 2013 and 2012, respectively. (See Note J, "Employee Savings, Stock Purchase, Long-Term Incentive and Supplemental Executive Retirement Plans," for details on the LTIP.)

The following table summarizes activity that relates to the Company's restricted stock unit awards:

	2014		2013		2012

Restricted stock units at January 1	539,106		774,217		657,825
Shares awarded	131,597		143,594		473,408
Shares vested	(298,791	)	(354,369	)	(350,349	)
Shares forfeited	(3,828	)	(24,336	)	(6,667	)

Restricted stock units at December 31	368,084		539,106		774,217

At December 31, 2014, the outstanding restricted stock units are expected to vest as follows: 2015-243,607; 2016-83,238; and 2017-41,239.

The Company has granted stock awards to its non-employee directors pursuant to the terms of the Director Plan. The Company recorded stock-based compensation expense related to Director Plan stock awards in the amounts of $814,000, $838,000 and $404,000 for the years ended December 31, 2014, 2013 and 2012, respectively.