Share-Based Compensation

Share-based compensation expense consists of:



	Second Quarter						First Six Months
	2013			2012			2013		2012
	(In thousands)
Cash-settled awards	$	(972	)	$	(1,800	)	$	5,675	$	282
Equity-settled awards	947			555			2,666		1,829
Restricted stock	61			508			456		1,122
Stock options	1,424			670			3,078		1,931
	$	1,460		$	(67	)	$	11,875	$	5,164

Share-based compensation expense is included in:



	Second Quarter					First Six Months
	2013		2012			2013		2012
	(In thousands)
General and administrative expense	$	501	$	(371	)	$	6,013	$	2,230
Other operating expense	959		304			5,862		2,934
	$	1,460	$	(67	)	$	11,875	$	5,164

In first six months 2013, share-based compensation expense increased principally as result of a 16 percent increase in our stock price since year-end 2012, compared to a 15 percent decrease in our stock price in first six months 2012 as compared to year-end 2011, which impacted the value of vested cash-settled awards.

The fair value of awards granted to retirement eligible employees and expensed at the date of grant was $590,000 in first six months 2013 and $595,000 in first six months 2012. Unrecognized share-based compensation expense related to non-vested equity-settled awards, restricted stock and stock options is $10,950,000 at second quarter-end 2013. The weighted average period over which this amount will be recognized is estimated to be two years. We did not capitalize any share-based compensation in first six months 2013 or 2012.

In first six months 2013, we withheld 54,500 shares having a value of $1,027,000 for payroll taxes in connection with vesting of restricted stock awards and exercises of stock options. In first six months 2012, we withheld 71,100 shares having a value of $1,151,000 for payroll taxes in connection with vesting of restricted stock awards and exercises of stock options.

A summary of awards granted under our 2007 Stock Incentive Plan follows:

Cash-settled awards

Cash-settled awards granted to our employees in the form of restricted stock units or stock appreciation rights generally vest over three to four years from the date of grant and generally provide for accelerated vesting upon retirement, death, disability or if there is a change in control. Vesting for some restricted stock unit awards is also conditioned upon achievement of a minimum one percent annualized return on assets over a three-year period. Cash-settled stock appreciation rights have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Stock appreciation rights were granted with an exercise price equal to the market value of our stock on the date of grant.

The following table summarizes the activity of cash-settled restricted stock unit awards in first six months 2013:



	Equivalent Units		Weighted Average Grant Date Fair Value
	(In thousands)		(Per unit)
Non-vested at beginning of period	350		$	17.03
Granted	89		18.70
Vested	(199	)	17.62
Forfeited	(2	)	17.42
Non-vested at end of period	238		17.90

The following table summarizes the activity of cash-settled stock appreciation rights in first six months 2013:



	Rights Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (Current Value Less Exercise Price)
	(In thousands)		(Per share)		(In years)	(In thousands)
Balance at beginning of period	866		$	11.38	6	$	5,256
Granted	—		—
Exercised	(243	)	10.27
Forfeited	—		—
Balance at end of period	623		11.81		6	5,140
Exercisable at end of period	575		11.31		6	5,033

The fair value of awards settled in cash was $6,694,000 in first six months 2013 and $4,710,000 in first six months 2012. At second quarter-end 2013, the fair value of vested cash-settled awards is $15,181,000 and is included in other liabilities. The aggregate current value of non-vested cash-settled awards is $4,874,000 at second quarter-end 2013 based on a quarter-end stock price of $20.06.

Equity-settled awards

Equity-settled awards granted to our employees include restricted stock units (RSU), which vest ratably over three years from the date of grant, market-leveraged stock units (MSU), which vest after three years from date of grant and performance stock units (PSU), which vest after approximately three years from date of grant if certain performance goals are met. Equity settled awards in the form of restricted stock units granted to our directors are fully vested at time of grant and issued upon retirement. The following table summarizes the activity of equity-settled awards in first six months 2013:



	Equivalent Units		Weighted Average Grant Date Fair Value
	(In thousands)		(Per share)
Non-vested at beginning of period	409		$	18.99
Granted	254		19.38
Vested	(66	)	16.39
Forfeited	(8	)	17.34
Non-vested at end of period	589		19.47

In first six months 2013, we granted 136,000 MSU awards. These awards will be settled in common stock based upon our stock price performance over three years from the date of grant. The number of shares to be issued could range from a high of 204,000 shares if our stock price increases by 50 percent or more, to a low of 68,000 shares if our stock price decreases by 50 percent, or could be zero if our stock price decreases by more than 50 percent, the minimum threshold performance. MSU awards are valued using a Monte Carlo simulation pricing model, which includes expected stock price volatility and risk-free interest rate assumptions. Compensation expense is recognized regardless of achievement of performance conditions, provided the requisite service period is satisfied.

Unrecognized share-based compensation expense related to non-vested equity-settled awards is $6,090,000 at second quarter-end 2013. The weighted average period over which this amount will be recognized is estimated to be two years.

Restricted stock

Restricted stock awards vest either ratably over or after three years, generally if we achieve a minimum one percent annualized return on assets over such three-year period. The following table summarizes the activity of restricted stock awards in first six months 2013:



	Restricted Shares		Weighted Average Grant Date Fair Value
	(In thousands)		(Per share)
Non-vested at beginning of period	211		$	16.95
Granted	—		—
Vested	(162	)	17.80
Forfeited	—		—
Non-vested at end of period	49		14.18

Unrecognized share-based compensation expense related to non-vested restricted stock awards is $181,000 at second quarter-end 2013. The weighted average period over which this amount will be recognized is estimated to be two years.

Stock options

Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. Options were granted with an exercise price equal to the market value of our stock on the date of grant. The following table summarizes the activity of stock option awards in first six months 2013:



	Options Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (Current Value Less Exercise Price)
	(In thousands)		(Per share)		(In years)	(In thousands)
Balance at beginning of period	1,756		$	20.53	7	$	1,956
Granted	373		18.70
Exercised	(73	)	15.85
Forfeited	(28	)	26.62
Balance at end of period	2,028		20.27		7	4,762
Exercisable at end of period	1,137		22.38		6	2,556

We estimate the fair value of stock options using the Black-Scholes option pricing model and the following assumptions:



	First Six Months
	2013			2012
Expected dividend yield	—		%	—		%
Expected stock price volatility	66.8		%	61.8		%
Risk-free interest rate	1.4		%	1.4		%
Expected life of options (years)	6			6
Weighted average estimated fair value of options granted	$	11.47		$	9.32

We have limited historical experience as a stand-alone company so we utilized alternative methods in determining our valuation assumptions. The expected life was based on the simplified method utilizing the midpoint between the vesting period and the contractual life of the awards. Our expected stock price volatility is based on a blended rate utilizing our historical volatility and historical prices of our peers’ common stock for a period corresponding to the expected life of the options. Pre-vesting forfeitures are estimated based upon the pool of participants and their expected activity and historical trends.

Unrecognized share-based compensation expense related to non-vested stock options is $4,679,000 at second quarter-end 2013. The weighted average period over which this amount will be recognized is estimated to be three years.

Pre-Spin Awards

Certain of our employees participated in Temple-Inland’s share-based compensation plans. In conjunction with the 2007 spin-off, these awards were equitably adjusted into separate awards of the common stock of Temple-Inland and the spin-off entities.

Pre-Spin stock option awards to our employees to purchase our common stock have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability or if there is a change in control. At second quarter-end 2013, there were 62,000 awards outstanding and exercisable on our stock with a weighted average exercise price of $25.77, weighted average remaining term of three years and aggregate intrinsic value of $34,000.