(19)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 stockholders’ equity. The table below presents information on compensation expense and the related tax benefit for all share-based awards:


(In thousands)	2019		2018
Compensation expense	$	571	$	341
Income tax benefit		156		93

Shares of our common stock issued under the 2010 Equity Incentive Plan shall be authorized shares. The maximum number of shares that will be awarded under the plan is 1,862,637 shares.

Stock Options

The table below presents the stock option activity of the Company:


		Weighted			Aggregate
		Average		Remaining	Intrinsic
		Exercise		Contractual	Value
	Options	Price		Life (years)	(in thousands)
Options outstanding at December 31, 2017	411,543	$	17.48	2.73	$	5,509
Granted	—		—	—		—
Exercised	73,889		17.36	—		973
Forfeited	—		—	—		—
Expired	—		—	—		—
Options outstanding at December 31, 2018	337,654	$	17.51	1.74	$	2,859
Granted	—		—	—		—
Exercised	221,245		17.50	—		2,483
Forfeited	—		—	—		—
Expired	—		—	—		—
Options outstanding at December 31, 2019	116,409	$	17.53	0.72	$	1,562

Options vested and exercisable at December 31, 2019	116,409	$	17.53	0.72	$	1,562

The following summarizes certain stock option activity of the Company:


(In thousands)	2019		2018
Intrinsic value of stock options exercised	$	2,483	$	973
Proceeds received from stock options exercised		3,873		1,283
Tax benefits realized from stock options exercised		534		229
Total fair value of stock options that vested		—		35

During the year ended December 31, 2019, the Company issued 91,840 shares of common stock in exchange for 221,245 stock options and 129,405 common shares. Pursuant to the provisions of our equity incentive plan, optionees are permitted to use the value of common stock they own in a stock swap transaction or use a net settlement method to pay the exercise price of stock options.

As of December 31, 2019, the Company had no unrecognized compensation costs related to the stock option plan.

Restricted Stock

Restricted stock is accounted for as a fixed grant using the fair value of the Company’s stock at the time of grant. Unvested restricted stock may not be disposed of or transferred during the vesting period. Restricted stock carries the right to receive dividends, although dividends attributable to restricted stock may be retained by the Company until the shares vest, at which time they are paid to the award recipient.

The table below presents the restricted stock activity:


		Weighted
		Average Grant
	Restricted	Date Fair
	Stock	Value
Unvested at December 31, 2017	10,806	$	29.16
Granted	10,019		30.73
Vested	4,401		28.63
Forfeited	—		—
Unvested at December 31, 2018	16,424	$	30.26

Unvested at December 31, 2018	16,424	$	30.26
Granted	10,366		27.30
Vested	6,541		30.14
Forfeited	—		—
Unvested at December 31, 2019	20,249	$	28.78

During the year ended December 31, 2019, the Company issued 10,336 shares of restricted stock to certain members of executive management under the 2010 Equity Incentive Plan. The fair value of the restricted stock is based on the value of the Company’s stock on the date of grant. Restricted stock will vest over three years from the date of the grant.

As of December 31, 2019, the Company had $365,000 of unrecognized compensation costs related to time-vested restricted stock. The unrecognized compensation costs are expected to be recognized over a weighted average period of 1.7 years.

During the year ended December 31, 2019, the Company issued 12,438 of performance-based restricted stock units (PRSUs) to certain members of executive management under the 2010 Equity Incentive Plan. These PRSUs will vest in the first quarter of 2022 after our Compensation Committee determines whether a performance condition that compares the Company’s return on average equity to the SNL Bank Index is achieved. Depending on the Company’s performance, the actual number of these PRSUs that are issued at the end of the vesting period can vary between 0% to 150% of the target award. For the PRSUs, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized. This estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.

The table below presents the PRSUs that will vest on a performance condition:


	Performance-
	Based Restricted
	Stock Units	Weighted
	Based on a	Average Grant
	Performance	Date Fair
	Condition	Value
Unvested at December 31, 2017	11,520	$	29.53
Granted	12,018		30.73
Vested	—		—
Forfeited	—		—
Unvested at December 31, 2018	23,538	$	30.14

Unvested at December 31, 2018	23,538	$	30.14
Granted	12,438		27.30
Vested	—		—
Forfeited	—		—
Unvested at December 31, 2019	35,976	$	29.16

The fair value of these PRSUs is based on the fair value of the Company’s stock on the date of grant. As of December 31, 2019, the Company had $311,000 of unrecognized compensation costs related to these PRSUs. The unrecognized compensation costs are expected to be recognized over a weighted average period of 1.9 years. Performance will be measured over a three-year period and will be cliff vested.

During the year ended December 31, 2019, the Company issued 3,110 of PRSUs to certain members of executive management under the 2010 Equity Incentive Plan. These PRSUs will vest in the first quarter of 2022 after our Compensation Committee determines whether a market condition that compares the Company’s total stock return to the SNL Bank Index is achieved. The number of shares that will be expensed will not be adjusted for performance. The fair value of these PRSUs is based on a Monte Carlo valuation of the Company’s stock on the date of grant. The assumptions which were used in the Monte Carlo valuation of the PRSUs are:

Grant date: March 7, 2019

Performance period: January 1, 2019 to December 31, 2021

2.82 year risk-free rate on grant date: 2.45%

December 31, 2018 closing price: $25.98

Closing stock price on date of grant: $27.30

Annualized volatility (based on 2.82 year historical volatility as of the grant date): 15.1%

The table below presents the PRSUs that will vest on a market condition:



	Performance-
	Based Restricted	Monte Carlo
	Stock Units	Valuation of
	Based on a	the Company's
	Market Condition	Stock
Unvested at December 31, 2017	2,879	$	24.44
Granted	3,005		28.32
Vested	—		—
Forfeited	—		—
Unvested at December 31, 2018	5,884	$	26.42

Unvested at December 31, 2018	5,884	$	26.42
Granted	3,110		24.45
Vested	—		—
Forfeited	—		—
Unvested at December 31, 2019	8,994	$	25.74

As of December 31, 2019, the Company had $67,000 of unrecognized compensation costs related to the PRSUs that are based on a market condition. The unrecognized compensation costs are expected to be recognized over a weighted average period of 1.9 years. Performance will be measured over a three-year period and will be cliff vested.

On May 16, 2019, shareholders of Territorial Bancorp Inc. adopted the 2019 Equity Incentive Plan, which provides for the award of 15,000 stock options and restricted stock to key officers and directors. As of December 31, 2019, no awards have been granted under the 2019 Equity Incentive Plan.