Stock-Based Compensation

Stock options generally vest ratably over three years and expire five years after they become exercisable or vest ratably over four years and expire ten years from date of grant. Restricted stock awards issued generally have a five-year cliff vesting or four year ratable vesting schedule. The Company issues new shares of common stock to satisfy share option exercises and restricted stock awards.

On July 24, 2014, the Company's shareholders approved the Heritage Financial Corporation 2014 Omnibus Equity Plan (the "Plan") under which 1,500,000 shares of the Company's common stock may be issued in the form of nonqualified stock option awards, restricted stock awards and restricted stock unit awards.

As of December 31, 2014, 1,384,105 shares remain available for future issuances under the Plan.

(a) Stock Option Awards

For the years ended December 31, 2014, 2013 and 2012 the Company recognized compensation expense related to stock options of $20,000, $71,000 and $106,000, respectively, with related tax benefits of $0, $0 and $1,000, respectively. As of December 31, 2014, all of the compensation expense related to the outstanding stock options had been recognized. The intrinsic value from options exercised during the years ended December 31, 2014, 2013 and 2012 were $459,000, $54,000 and $31,000, respectively. The cash proceeds from options exercised during the years ended December 31, 2014, 2013 and 2012 were $915,000, $200,000, and $129,000, respectively.

The following tables summarize the stock option activity for the years ended December 31, 2014, 2013 and 2012:



	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (In years)	Aggregate Intrinsic Value (In thousands)
Outstanding at December 31, 2011	417,123		$	18.33
Granted	—		—
Exercised	(11,365	)	11.35
Forfeited or expired	(105,100	)	21.52
Outstanding at December 31, 2012	300,658		17.48
Granted	—		—
Exercised	(16,553	)	12.10
Forfeited or expired	(89,623	)	22.07
Outstanding at December 31, 2013	194,482		15.82
Granted (1)	90,248		10.72
Exercised	(84,189	)	10.86
Forfeited or expired	(44,134	)	22.76
Outstanding at December 31, 2014	156,407		$	13.59	2.63	$	647
Vested and expected to vest at December 31, 2014	156,407		$	13.59	2.63	$	647
Exercisable at December 31, 2014	156,407		$	13.59	2.63	$	647


(1)	Options granted during the year ended December 31, 2014 represent the stock options issued in conjunction with the Washington Banking Merger. See "Note 2. Business Combinations" for additional information. The weighted average exercise price reflects the exchange ratio applied to the original Washington Banking exercise price pursuant to the Merger Agreement.

(b) Restricted and Unrestricted Stock Awards

For the years ended December 31, 2014, 2013 and 2012 the Company recognized compensation expense related to restricted and unrestricted stock awards of $1.4 million, $1.2 million and $1.2 million, respectively, and related tax benefits of $489,000, $428,000 and $415,000, respectively. As of December 31, 2014, the total unrecognized compensation expense related to non-vested restricted and unrestricted stock awards was $2.5 million and the related weighted average period over which it is expected to be recognized is approximately 2.32 years. The vesting date fair value of restricted stock awards that vested during the years ended December 31, 2014, 2013 and 2012 was $1.4 million, $1.2 million and $842,000, respectively.

The following tables summarize the restricted and unrestricted stock award activity for the years ended December 31, 2014, 2013 and 2012:



	Shares		Weighted-Average Grant Date Fair Value
Nonvested at December 31, 2011	164,880		$	16.29
Granted	91,738		14.02
Vested	(61,445	)	17.41
Forfeited	(5,503	)	15.21
Nonvested at December 31, 2012	189,670		14.86
Granted	103,195		14.31
Vested	(86,819	)	15.55
Forfeited	(3,107	)	14.89
Nonvested at December 31, 2013	202,939		14.29
Granted	130,548		16.03
Vested	(85,373	)	14.37
Forfeited	(9,445	)	14.67
Nonvested at December 31, 2014	238,669		$	15.20