Note 16. 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 with performance criteria. At September 30, 2013 and December 31, 2012, stock options or other awards or units available for grant under the Plan or its predecessor plans totaled 3,132,053 and 3,016,108, 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 140,000 and 158,000 stock awards available for future grant in accordance with the Director Plan at September 30, 2013 and December 31, 2012, 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 (as defined in the plans).

The Company recorded stock-based compensation expense of $4.5 million for the three months ended September 30, 2013 and 2012. Stock-based compensation expense totaled $13.7 million and $11.7 million for the nine months ended September 30, 2013 and 2012, respectively. Stock-based compensation expenses have been allocated to the Company’s business units and included in “Financial services” and “Selling, general and administrative” expenses within the Consolidated Statements of Earnings.

A summary of stock option activity in accordance with the Company’s equity incentive plans as of September 30, 2013 and 2012, and changes for the nine-month periods then ended, follows:

					WEIGHTED-
			WEIGHTED-		AVERAGE	AGGREGATE
			AVERAGE		REMAINING	INTRINSIC
			EXERCISE		CONTRACTUAL	VALUE
	SHARES		PRICE		LIFE (in years)	(in thousands)
Options outstanding at January 1, 2012	3,948,874		$	28.91	2.4
Granted	756,000		18.55
Exercised	(380,813	)	18.30
Forfeited	(699,498	)	35.33
Options outstanding at September 30, 2012	3,624,563		$	26.62	3.0	$	28,297
Available for future grant	3,071,288
Total shares reserved at September 30, 2012	6,695,851
Options exercisable at September 30, 2012	2,172,926		$	32.01	1.8	$	11,667
Options outstanding at January 1, 2013	3,419,423		$	26.92	2.9
Granted	-		-
Exercised	(815,394	)	25.07
Forfeited	(60,289	)	21.24
Options outstanding at September 30, 2013	2,543,740		$	27.65	2.5	$	40,113
Available for future grant	3,132,053
Total shares reserved at September 30, 2013	5,675,793
Options exercisable at September 30, 2013	1,839,432		$	31.38	1.7	$	24,172

Stock-based compensation expense related to employee stock options totaled $699,000 and $1.4 million for the three-month periods ended September 30, 2013 and 2012, respectively. Stock-based compensation expense related to employee stock options totaled $2.8 million and $3.7 million for the nine-month periods ended September 30, 2013 and 2012, respectively.

During the three-month periods ended September 30, 2013 and 2012, the intrinsic values of stock options exercised totaled $756,000 and $2.4 million, respectively. During the nine-month periods ended September 30, 2013 and 2012, the intrinsic values of stock options exercised totaled $14.1 million and $2.7 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.

Compensation expense associated with restricted stock unit awards totaled $3.6 million and $2.9 million for the three-month periods ended September 30, 2013 and 2012, respectively. For the nine-month periods ended September 30, 2013 and 2012, compensation expense associated with restricted stock unit awards totaled $10.3 million and $7.7 million, respectively.

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

	2013		2012
Restricted stock units at January 1	774,217		657,825
Shares awarded	143,594		400,568
Shares vested	(354,369	)	(350,349	)
Shares forfeited	(21,534	)	(6,667	)
Restricted stock units at September 30	541,908		701,377

At September 30, 2013, the Company’s outstanding restricted stock units are expected to vest as follows: 2014—299,913; 2015—194,135; and 2016—47,860.

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 $205,000 and $108,000 for the three-month periods ended September 30, 2013 and 2012, respectively. For the nine-month periods ended September 30, 2013 and 2012, stock-based compensation expense related to Director Plan stock awards totaled $589,000 and $296,000, respectively.