Share-Based Compensation

3 Months Ended

Mar. 31, 2024

2010 Equity Incentive Plan

Share-Based Compensation

Share-Based Compensation

(12)    Share-Based Compensation

The shareholders of Territorial Bancorp Inc. adopted the 2010 Equity Incentive Plan and the 2019 Equity Incentive Plan. These plans provide for the award of stock options and restricted stock to key officers and directors. In accordance with the Compensation – Stock Compensation topic of the FASB ASC, the cost of the equity incentive plans is based on the fair value of the awards on the grant date. The fair value of time-based restricted stock is based on the closing price of the Company’s stock on the grant date. The fair value of performance-based stock that will vest based on a performance condition is based on the closing price of the Company’s stock on the date of grant. The fair value of performance-based restricted stock that will vest on a market condition is based on a Monte Carlo valuation of the Company’s stock on the date of grant. The cost of the awards will be recognized on a straight-line basis over the three-year vesting period during which participants are required to provide services in exchange for the awards. There are 42,680 remaining shares available for new awards under the 2019 Equity Plan.

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 Consolidated Statements of Operations 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:

	Three Months Ended
	March 31,
(Dollars in thousands)	2024		2023
Compensation expense	$	81	$	(42)
Income tax benefit		22		(11)

Share-based compensation expense and the income tax benefit had credit balances during the three months ended March 31, 2023. The credit balances occurred when the number of performance-based restricted stock units (PRSUs), which are based on a performance condition, decreased because the Company’s three-year return on average equity declined in comparison to a peer group of banks.

Restricted Stock

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 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 are retained by the Company until the shares vest, at which time they are paid to the award recipient. Unvested restricted stock that is time-based contain nonforfeitable dividend rights.  Accrued dividends on restricted stock that do not vest based on performance or market conditions are forfeited. 

The table below presents the time-based restricted stock activity:

		Weighted
	Time-Based	Average Grant
	Restricted	Date Fair
	Stock	Value
Unvested at December 31, 2023	25,738	$	21.61
Granted	—		—
Vested	—		—
Forfeited	—		—
Unvested at March 31, 2024	25,738	$	21.61
Unvested at December 31, 2022	23,664	$	24.15
Granted	—		—
Vested	4,540		21.05
Forfeited	—		—
Unvested at March 31, 2023	19,124	$	24.89

As of March 31, 2024, the Company had $288,000 of unrecognized compensation costs related to time-based restricted stock.

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, 2023	44,967	$	22.85
Granted	—		—
Vested	—		—
Forfeited	12,797		26.77
Unvested at March 31, 2024	32,170	$	21.30
Unvested at December 31, 2022	43,557	$	23.63
Granted	—		—
Vested	—		—
Forfeited	16,348		21.05
Unvested at March 31, 2023	27,209	$	25.18

The fair value of these PRSUs is based on the fair value of the Company’s stock on the date of grant. As of March 31, 2024, the Company had no unrecognized compensation costs related to these PRSUs since meeting the performance condition is not probable. Compensation expense up to $457,000 may be recognized in the future if achievement of the performance condition becomes probable. Performance will be measured over a three-year performance period and will be cliff vested. The performance condition is measured quarterly by comparing the Company’s three-year return on average equity to a peer group of banks. The Company’s percentile ranking in the peer group is used to adjust the number of PRSUs that are expected to vest.

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, 2023	11,245	$	22.31
Granted	—		—
Vested	—		—
Forfeited	3,199		26.00
Unvested at March 31, 2024	8,046	$	20.85
Unvested at December 31, 2022	10,889	$	24.04
Granted	—		—
Vested	—		—
Forfeited	4,087		22.16
Unvested at March 31, 2023	6,802	$	25.16

As of March 31, 2024, the Company had $50,000 of unrecognized compensation costs related to the PRSUs that are based on a market condition. The market value of PRSUs that will vest on a market condition is determined by a Monte Carlo valuation of the Company’s stock as of the grant date. Performance will be measured over a three-year performance period and will be cliff vested. The market condition is measured quarterly by comparing the Company’s three-year average total stock return to a peer group of other banks. The Company’s percentile ranking in the peer group determines how many PRSUs will vest.