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 four-year cliff vesting or four-year ratable vesting schedule. Restricted stock units vest ratably over three years. Performance restricted stock units issued generally have a three-year cliff vesting schedule. Additionally, performance restricted stock unit grants may be subject to performance-based vesting as well as other approved vesting conditions. The Company issues new shares of common stock to satisfy share option exercises, restricted stock awards and restricted stock units.

On July 24, 2014, the Company's shareholders approved the Heritage Financial Corporation 2014 Omnibus Equity Plan (the "Plan") that provides for the issuance of 1,500,000 shares of the Company's common stock in the form of stock options, stock appreciation rights, stock awards (which includes restricted stock units, restricted stock, performance units, performance shares or bonus shares) and cash incentive awards.

Under the Company's stock-based compensation plans, 1,069,529 shares remain available for future issuance as of June 30, 2017.

(a) Stock Option Awards

For the three and six months ended June 30, 2017 and 2016, the Company did not recognize any compensation expense or related tax benefit related to stock options as all of the compensation expense related to the outstanding stock options had been previously recognized. The intrinsic value and cash proceeds from options exercised during the six months ended June 30, 2017 was $98,000 and $109,000, respectively. The intrinsic value and cash proceeds from options exercised during the six months ended June 30, 2016 was $90,000 and $369,000, respectively.

The following table summarizes the stock option activity for the six months ended June 30, 2017 and 2016:



	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (In years)	Aggregate Intrinsic Value (In thousands)
Outstanding at December 31, 2015	79,408		$	14.19
Exercised	(25,574	)	14.43
Forfeited or expired	(4,200	)	16.80
Outstanding at June 30, 2016	49,634		$	13.84	3.05	$	185

Outstanding at December 31, 2016	37,495		$	13.77
Exercised	(8,372	)	13.03
Forfeited or expired	(1,308	)	13.53
Outstanding, vested and expected to vest and exercisable at June 30, 2017	27,815		$	14.00	2.63	$	348

(b) Restricted Stock Awards

For the three and six months ended June 30, 2017, the Company recognized compensation expense related to restricted stock awards of $359,000 and $804,000, respectively, and a related tax benefit of $126,000 and $282,000, respectively. For the three and six months ended June 30, 2016, the Company recognized compensation expense related to restricted stock awards of $427,000 and $872,000, respectively, and a related tax benefit of $150,000 and $305,000, respectively. As of June 30, 2017, the total unrecognized compensation expense related to non-vested restricted stock awards was $2.2 million and the related weighted average period over which the compensation expense is expected to be recognized is approximately 2.03 years. The vesting date fair value of the restricted stock awards that vested during the six months ended June 30, 2017 and 2016 was $2.6 million and $1.7 million, respectively.

The following table summarizes the restricted stock award activity for the six months ended June 30, 2017 and 2016:



	Shares		Weighted-Average Grant Date Fair Value
Nonvested at December 31, 2015	264,521		$	15.92
Granted	119,383		17.52
Vested	(96,009	)	15.83
Forfeited	(4,221	)	16.38
Nonvested at June 30, 2016	283,674		$	16.62

Nonvested at December 31, 2016	261,296		$	16.80
Granted	—		—
Vested	(105,972	)	16.47
Forfeited	(7,704	)	16.78
Nonvested at June 30, 2017	147,620		$	17.04

For the three and six months ended June 30, 2017, the Company recognized compensation expense related to restricted stock units of $171,000 and $236,000, respectively. As of June 30, 2017, the total unrecognized compensation expense related to non-vested restricted stock units was $2.1 million and the related weighted average period over which the compensation expense is expected to be recognized is approximately 2.52 years.

The following table summarizes the restricted stock unit activity for the six months ended June 30, 2017:



	Shares		Weighted-Average Grant Date Fair Value
Nonvested at December 31, 2016	—		$	—
Granted	92,019		25.29
Vested	—		—
Forfeited	(909	)	25.35
Nonvested at June 30, 2017	91,110		$	25.29

The following table summarizes the assumptions used in the Monte Carlo model for restricted stock unit grants with market-based conditions:



Grant Period Ending	Expected Term in Years	Weighted-Average Risk Free Interest Rate		Expected Volatility		Expected Dividend Yield		Weighted-Average Fair Value
June 30, 2017	2.85	1.40	%	21.8	%	—	%	$	24.39