(11) Share-Based Compensation

On August 19, 2010, Territorial Bancorp Inc. adopted the 2010 Equity Incentive Plan, which provides for awards of stock options and restricted stock to key officers and outside directors. In accordance with the Compensation – Stock Compensation topic of the FASB ASC, the cost of the 2010 Equity Incentive Plan is based on the fair value of the awards on the grant date. The fair value of restricted stock is based on the closing price of the Company’s stock on the grant date. The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate and option term. These assumptions are based on our judgments regarding future events, are subjective in nature, and cannot be determined with precision. The cost of the awards will be recognized on a straight-line basis over the three, five- or six-year vesting period during which participants are required to provide services in exchange for the awards.

The Company recognized compensation expense, measured as the fair value of the share-based award on the date of grant, on a straight-line basis over the vesting period. Share-based compensation is recorded in the statement of income as a component of salaries and employee benefits with a corresponding increase in shareholders’ equity. The table below presents information on compensation expense and the related tax benefit for all share-based awards:


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
(In thousands)	2016		2015		2016		2015
Compensation expense	$	661	$	667	$	1,323	$	1,328
Income tax benefit		266		268		531		533

Shares of our common stock issued under the 2010 Equity Incentive Plan shall be authorized but unissued shares. On May 26, 2016, the shareholders approved an amendment to the 2010 Equity Incentive Plan increasing the maximum number of shares which can be awarded under the plan by 150,000 shares to 1,862,637 shares.

Stock Options

The table below presents the stock option activity for the six months ended June 30, 2016 and 2015:


		Weighted			Aggregate
		Average		Remaining	Intrinsic
		Exercise		Contractual	Value
	Options	Price		Life (years)	(in thousands)
Options outstanding at December 31, 2015	832,300	$	17.42	4.70	$	8,588
Granted	—		—	—		—
Exercised	61,340		17.36	4.24		539
Forfeited	—		—	—		—
Expired	—		—	—		—
Options outstanding at June 30, 2016	770,960	$	17.43	4.20	$	6,972

Options outstanding at December 31, 2014	832,954	$	17.38	5.68	$	3,471
Granted	—		—	—		—
Exercised	—		—	—		—
Forfeited	—		—	—		—
Expired	—		—	—		—
Options outstanding at June 30, 2015	832,954	$	17.38	5.18	$	5,728

Options vested and exercisable at June 30, 2016	631,686	$	17.38	4.18	$	5,739

There were 45,070 stock options exercised during the three months ended June 30, 2016 and 61,340 stock options exercised during the six months ended June 30, 2016. There were no stock options exercised during the three or six months ended June 30, 2015.

The following summarizes certain stock option activity of the Company:


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
(In thousands)	2016		2015		2016		2015
Intrinsic value of stock options exercised	$	400	$	—	$	539	$	—
Proceeds received from stock options exercised		782		—		1,065		—
Tax benefits realized from stock options exercised		57		—		95		—
Total fair value of stock options that vested		—		—		—		—

During the six months ended June 30, 2016, we issued 9,797 shares of common stock in exchange for 28,800 stock options and 19,003 common shares. Pursuant to the provisions of our equity incentive plan, optionees are permitted to use the value of our common stock they own in a stock swap transaction to pay the exercise price of stock options.

No stock options vested during the six months ended June 30, 2016 or 2015.

As of June 30, 2016, the Company had $128,000 of unrecognized compensation costs related to the stock option plan. The cost of the stock option plan is being amortized over the three-, five- or six-year vesting period.

Restricted Stock Awards

Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of grant. Unvested restricted stock awards may not be disposed of or transferred during the vesting period. Restricted stock awards carry with them the right to receive dividends.

The table below presents the restricted stock award activity:


		Weighted
		Average Grant
	Restricted	Date Fair
	Stock Awards	Value
Nonvested at December 31, 2015	114,542	$	17.67
Granted	—		—
Vested	—		—
Forfeited	—		—
Nonvested at June 30, 2016	114,542	$	17.67

Nonvested at December 31, 2014	226,733	$	17.39
Granted	—		—
Vested	—		—
Forfeited	—		—
Nonvested at June 30, 2015	226,733	$	17.39

As of June 30, 2016, the Company had $396,000 of unrecognized compensation costs related to restricted stock awards. The cost of the restricted stock awards is being amortized over the three-, five- or six-year vesting period.