Employee Stock Ownership Plan

6 Months Ended

Jun. 30, 2016

(10) Employee Stock Ownership Plan

Effective January 1, 2009, Territorial Savings Bank adopted an Employee Stock Ownership Plan (ESOP) for eligible employees. The ESOP borrowed $9.8 million from the Company and used those funds to acquire 978,650 shares, or 8%, of the total number of shares issued by the Company in its initial public offering. The shares were acquired at a price of $10.00 per share.

The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20-year term of the loan with funds from Territorial Savings Bank’s contributions to the ESOP and dividends payable on the shares. The interest rate on the ESOP loan is an adjustable rate equal to the prime rate, as published in The Wall Street Journal. The interest rate adjusts annually and will be the prime rate on the first business day of the calendar year.

Shares purchased by the ESOP are held by a trustee in an unallocated suspense account, and shares are released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company. The trustee allocates the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants. As shares are committed to be released from the suspense account, Territorial Savings Bank reports compensation expense based on the average fair value of shares released with a corresponding credit to stockholders’ equity. The shares committed to be released are considered outstanding for earnings per share computations. Compensation expense recognized for the three months ended June 30, 2016 and 2015 amounted to $259,000 and $241,000, respectively. Compensation expense recognized for the six months ended June 30, 2016 and 2015 amounted to $521,000 and $463,000, respectively.

Shares held by the ESOP trust were as follows:


	June 30,		December 31,
	2016		2015
Allocated shares		348,828		325,677
Unearned shares		611,659		636,125
Total ESOP shares		960,487		961,802
Fair value of unearned shares, in thousands	$	16,191	$	17,646

The ESOP restoration plan is a nonqualified plan that provides supplemental benefits to certain executives who are prevented from receiving the full benefits contemplated by the ESOP’s benefit formula. The supplemental cash payments consist of payments representing shares that cannot be allocated to the participants under the ESOP due to IRS limitations imposed on tax-qualified plans. We accrue for these benefits over the period during which employees provide services to earn these benefits. For the three months ended June 30, 2016 and 2015, we accrued $45,000 and $40,000, respectively, for the ESOP restoration plan. For the six months ended June 30, 2016 and 2015, we accrued $121,000 and $104,000, respectively, for the ESOP restoration plan.