SHARE-BASED COMPENSATION

We have a share-based compensation incentive plan which allows us to grant stock options, restricted stock, RSUs, and other awards to employees and non-employee directors. Total shares authorized under the plan were 9,000,000 at December 31, 2018, of which 4,407,113 were available for future grants.

All share-based payments to employees, including grants of employee stock options, are recognized in the statement of income based on their grant date values. The value of an equity award is estimated on the grant date using a fair value-based model without regard to service or performance vesting conditions, but does consider post-vesting restrictions.

We classify all share-based awards as equity instruments. Compensation expense is included in salaries and employee benefits in the statement of income, with the corresponding increase included in additional-paid-in-capital. Substantially all awards of stock options, restricted stock, and RSUs have graded vesting that is recognized on a straight-line basis over the vesting period.

Compensation expense and the related tax benefit for all share-based awards were as follows:



(In millions)	2018		2017		2016

Compensation expense	$	26	$	25	$	26
Reduction of income tax expense	14		19		9

During 2017, as a result of our adoption of ASU 2016-09, the tax effects recognized from the exercise of stock options and the vesting of restricted stock and RSUs was recorded as a $9 million reduction of income tax expense. Income tax was reduced by $8 million during 2018 as a result of applying this new accounting standard. Also, upon the adoption of ASU 2016-09, we elected to account for forfeitures of share-based compensation awards as they occur, rather than estimating forfeitures as was previously done. There was no material impact from the cumulative effect adjustment to retained earnings from this change.

Prior to our adoption of ASU 2016-09, the tax effects recognized from the exercise of stock options and the vesting of restricted stock and RSUs increased common stock by approximately $2 million in 2016. This amount is included in the net activity under employee plans and related tax benefits in the statement of changes in shareholders’ equity.

During both 2018 and 2017, we reduced share-based compensation expense by $1 million as a result of using a valuation model to estimate a liquidity discount on RSUs with post-vesting restrictions.

As of December 31, 2018, compensation expense not yet recognized for nonvested share-based awards was approximately $25 million, which is expected to be recognized over a weighted average period of 2.4 years.

Stock Options

Stock options granted to employees generally vest at the rate of one third each year and expire seven years after the date of grant. For all stock options granted in 2018, 2017, and 2016, we used the Black-Scholes option pricing model to estimate the grant date value of stock options in determining compensation expense. The following summarizes the weighted average value at grant date and the significant assumptions used in applying the Black-Scholes model for options granted:



	2018			2017			2016
Weighted average value for options granted	$	12.64		$	10.69		$	5.24
Weighted average assumptions used:
Expected dividend yield	2.0		%	1.8		%	1.3		%
Expected volatility	27.5		%	30.0		%	30.0		%
Risk-free interest rate	2.62		%	1.81		%	1.21		%
Expected life (in years)	5.0			5.0			5.0

The assumptions for expected dividend yield, expected volatility, and expected life reflect management’s judgment and include consideration of historical experience. Expected volatility is based in part on historical volatility. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

The following summarizes our stock option activity for the three years ended December 31, 2018:



	Number of shares		Weighted average exercise price

Balance at December 31, 2015	3,804,095		$	27.30
Granted	789,651		21.25
Exercised	(1,055,532	)	23.75
Expired	(56,297	)	61.60
Forfeited	(44,007	)	27.66
Balance at December 31, 2016	3,437,910		26.44
Granted	195,882		44.18
Exercised	(941,761	)	26.03
Expired	(58,257	)	66.20
Forfeited	(73,203	)	25.63
Balance at December 31, 2017	2,560,571		27.06
Granted	194,001		55.13
Exercised	(729,346	)	26.79
Expired	(2,000	)	25.74
Forfeited	(18,628	)	31.11
Balance at December 31, 2018	2,004,598		29.85
Outstanding stock options exercisable as of:
December 31, 2018	1,448,244		$	26.68
December 31, 2017	1,648,367		26.55
December 31, 2016	1,892,136		27.60

We issue new authorized common shares for the exercise of stock options. The total intrinsic value of stock options exercised was approximately $20 million in 2018, $17 million in 2017, and $10 million in 2016. Cash received from the exercise of stock options was $18 million in 2018, $23 million in 2017, and $24 million in 2016.

Additional selected information on stock options at December 31, 2018 follows:



	Outstanding stock options						Exercisable stock options
Exercise price range	Number of shares	Weighted average exercise price		Weighted average remaining contractual life (years)			Number of shares	Weighted average exercise price

$ 0.32 to $19.99	122,882	$	16.47		0.4	¹	122,882	$	16.47
$20.00 to $24.99	486,810	21.10			3.9		262,382	21.18
$25.00 to $29.99	992,442	28.33			2.6		977,214	28.38
$30.00 to $39.99	32,191	30.10			2.4		32,191	30.10
$40.00 to $44.99	178,703	44.15			5.0		53,575	44.10
$50.00 to $55.68	191,570	55.13			6.0		—	—
	2,004,598	29.85			3.4	¹	1,448,244	26.68


¹	The weighted average remaining contractual life excludes 21,252 stock options without a fixed expiration date that were assumed with the Amegy acquisition. They expire between the date of termination and one year from the date of termination, depending upon certain circumstances.

The aggregate intrinsic value of outstanding stock options at December 31, 2018 and 2017 was $25 million and $61 million, respectively, while the aggregate intrinsic value of exercisable options was $21 million and $40 million at the same respective dates. For exercisable options, the weighted average remaining contractual life was 2.7 years and 2.9 years at December 31, 2018 and 2017, respectively, excluding the stock options previously noted without a fixed expiration date. At December 31, 2018, 556,354 stock options with a weighted average exercise price of $38.08, a weighted average remaining life of 4.9 years, and an aggregate intrinsic value of $5 million, were expected to vest.

Restricted Stock and Restricted Stock Units

Restricted stock is common stock with certain restrictions that relate to trading and the possibility of forfeiture. Generally, restricted stock vests over four years. Holders of restricted stock have full voting rights and receive dividend equivalents during the vesting period. In addition, holders of restricted stock can make an election to be subject to income tax on the grant date rather than the vesting date.

RSUs represent rights to one share of common stock for each unit and generally vest over four years. Holders of RSUs receive dividend equivalents during the vesting period, but do not have voting rights.

Compensation expense is determined based on the number of restricted shares or RSUs granted and the market price of our common stock at the issue date.

During 2018, 2017, and 2016, we granted 14,796, 20,711, and 32,310 RSUs, respectively, to non-employee directors. The RSUs vested immediately upon grant.

The following summarizes our restricted stock activity for the three years ended December 31, 2018:



	Number of shares		Weighted average issue price

Nonvested restricted shares at December 31, 2015	59,370		$	23.49
Issued	36,594		24.43
Vested	(32,709	)	20.80
Nonvested restricted shares at December 31, 2016	63,255		25.43
Issued	314		44.55
Vested	(24,591	)	24.90
Nonvested restricted shares at December 31, 2017	38,978		25.91
Issued	21,634		42.90
Vested	(14,836	)	26.27
Forfeited	(90	)	55.68
Nonvested restricted shares at December 31, 2018	45,686		33.78

The following summarizes our RSU activity for the three years ended December 31, 2018:



	Number of restricted stock units		Weighted average grant price

Restricted stock units at December 31, 2015	1,798,543		$	27.39
Granted	1,033,167		21.69
Vested	(724,713	)	25.88
Forfeited	(59,839	)	26.28
Restricted stock units at December 31, 2016	2,047,158		25.08
Granted	587,396		41.78
Vested	(803,492	)	26.19
Forfeited	(121,249	)	28.12
Restricted stock units at December 31, 2017	1,709,813		30.08
Granted	461,305		53.17
Vested	(699,920	)	29.56
Forfeited	(70,499	)	35.95
Restricted stock units at December 31, 2018	1,400,699		37.65

The total value at grant date of restricted stock and RSUs vested during the year was $21 million in 2018, $22 million in 2017, and $19 million in 2016. At December 31, 2018, 45,686 shares of restricted stock and 907,159 RSUs were expected to vest with an aggregate intrinsic value of $2 million and $37 million, respectively.