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Stock-Based Compensation
 12 Months Ended
Dec. 31, 2019
Stock-Based Compensation  
Stock-Based Compensation
26. STOCK-BASED COMPENSATION
Stock-based awards are eligible for issuance under the Bancorp’s Incentive Compensation Plan to executives, directors and key employees of the Bancorp and its subsidiaries. The 2019 Incentive Compensation Plan was approved by shareholders on April 16, 2019 and authorized the issuance of up to 40 million shares, as equity compensation and provides for SARs, RSAs, RSUs, stock options, performance share or unit awards, dividend or dividend equivalent rights and stock awards. As of December 31, 2019, there were 39.5 million shares available for future issuance. Based on total stock-based awards outstanding (including SARs, RSAs, RSUs, stock options and PSAs) and shares remaining for future grants under the 2019 Incentive Compensation Plan, the potential dilution to which the Bancorp’s shareholders of common stock are exposed due to the potential that stock-based compensation will be awarded to executives, directors or key employees of the Bancorp and its subsidiaries is 10%. SARs, RSAs, RSUs, stock options and PSAs outstanding represent 5% of the Bancorp’s issued shares at December 31, 2019.
All of the Bancorp’s stock-based awards are to be settled with stock. The Bancorp has historically used treasury stock to settle stock-based awards, when available. SARs, issued at fair value based on the closing price of the Bancorp’s common stock on the date of grant, have up to ten year terms and vest and become exercisable ratably over a three or four-year period of continued employment. The Bancorp does not grant discounted SARs or stock options,
re-price
previously granted SARs or stock options or grant reload stock options. RSAs and RSUs are released after three or four years or ratably over three or four years of continued employment. RSAs include dividend and voting rights while RSUs receive dividend equivalents only. Stock options were previously issued at fair value based on the closing price of the Bancorp’s common stock on the date of grant, had up to ten year terms and vested and became fully exercisable ratably over a three or four-year period of continued employment. PSAs have three-year cliff vesting terms with performance conditions as defined by the plan. All of the Bancorp’s executive stock-based awards contain an annual performance hurdle of 2% return on tangible common equity.
If this threshold is not met in any one of the three years during the performance period,
one-third
of PSAs are forfeited. Additionally, if this threshold is not met, all SARs, RSAs and RSUs that would vest in the next year may also be forfeited at the discretion of the Human Capital and Compensation Committee of the Board of Directors. The Bancorp met this threshold as of December 31, 2019.
Under the terms of the merger agreement with MB Financial, Inc., the Bancorp granted stock-based awards to replace those awards previously granted by MB Financial, Inc. that were outstanding as of the date of the merger. The replacement awards included RSAs, RSUs, and stock options. Approximately 1.65 replacement awards were granted to replace each outstanding MB Financial, Inc. award and the strike prices of replacement stock options were also adjusted to reflect this exchange ratio. Otherwise, the replacement awards were granted with substantially the same terms as the MB Financial, Inc. awards that were being replaced, including vesting and expiration dates.
The fair value of the awards being replaced and the replacement awards were measured as of the date of the merger. The portion of the fair value of the awards being replaced which was attributable to
pre-combination
service was included as a component of the consideration paid in the merger. The portion attributable to post-combination service, in addition to any increased value of the replacement awards over the awards being replaced, was recognized as stock-based compensation expense over each award’s remaining service period.
Stock-based compensation expense was $132 million, $127 million and $118 million for the years ended December 31, 2019, 2018 and 2017, respectively, and is included in salaries, wages and incentives in the Consolidated Statements of Income. The total related income tax benefit recognized was $27 million, $27 million and $41 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Stock Appreciation Rights
The Bancorp uses assumptions, which are evaluated and revised as necessary, in estimating the grant-date fair value of each SAR grant.
The weighted-average assumptions were as follows for the years ended December 31:
   
  
2019        
 
  
2018        
    
2017        
  
   
Expected life (in years)
 
 
7
 
    
7
      
6
  
Expected volatility
 
 
32
%
   
35
      
37
  
Expected dividend yield
 
 
3.3
 
    
1.9
      
2.1
  
Risk-free interest rate
 
 
2.6
 
    
2.6
      
2.1
  
   
The expected life is generally derived from historical exercise patterns and represents the amount of time that SARs granted are expected to be outstanding. The expected volatility is based on a combination of historical and implied volatilities of the Bancorp’s common stock. The expected dividend yield is based on annual dividends divided by the Bancorp’s stock price. Annual dividends are based on projected dividends, estimated using an expected long-term dividend payout ratio, over the estimated life of the awards. The risk-free interest rate for periods within the contractual life of the SARs is based on the U.S. Treasury yield curve in effect at the time of grant.
The grant-date fair value of SARs is measured using the Black-Scholes option-pricing model.
The weighted-average grant-date fair value of SARs granted was $7.38, $11.33 and $8.55 per share for the years ended December 31, 2019, 2018 and 2017, respectively. The total grant-date fair value of SARs that vested during the years ended December 31, 2019, 2018 and 2017 was $20 million, $26 million and $29 million, respectively.
At December 31, 2019, there was $7 million of stock-based compensation expense related to outstanding SARs not yet recognized. The expense is expected to be recognized over an estimated remaining weighted-average period at December 31, 2019 of 1.1 years.
   
  
   
2019
   
2018
   
2017
 
                           
SARs (in thousands, except per share data)
 
   
Number of
SARs
   
   Weighted-
   Average Grant
   Price Per Share
   
Number of
SARs
   
   Weighted-
   Average Grant
   Price Per Share
   
Number of
SARs
   
   Weighted-
   Average Grant 
   Price Per Share 
  
   
Outstanding at January 1
   
   
 
26,196
 
  
$
17.30
 
    
31,929
     $
17.22
      
40,041
     $
18.30
  
Granted
   
   
 
399
 
  
 
26.72
 
    
272
      
33.15
      
3,672
      
26.52
  
Exercised
   
   
 
(4,829)
 
  
 
13.34
 
    
(5,058)
      
16.96
      
(6,953)
      
16.00
  
Forfeited or expired
   
   
 
(317)
 
  
 
23.47
 
    
(947)
      
20.93
      
(4,831)
      
35.08
  
   
Outstanding at December 31
   
   
 
21,449
 
  
$
18.38
 
    
26,196
     $
17.30
      
31,929
     $
17.22
  
   
Exercisable at December 31
   
   
 
18,249
 
  
$
17.50
 
    
20,132
     $
15.90
      
21,403
     $
15.30
  
   
The following table summarizes outstanding and exercisable SARs by grant price per share at December 31, 2019:
   
  
Outstanding SARs
   
   
Exercisable SARs
 
             
SARs (in thousands, except per share data)
 
Number of
SARs
   
   Weighted-
   Average Grant
   Price Per Share
   
Weighted-
Average Remaining
Contractual Life
(in years)
   
   
Number of
SARs
   
   Weighted-
   Average Grant
   Price Per Share
   
Weighted-
Average Remaining
Contractual Life
(in years)
 
   
$10.01-$20.00
   
15,944
     $
16.12
      
3.7       
      
     
14,694
     $
16.00
      
3.5       
  
$20.01-$30.00
   
5,236
      
24.50
      
6.1       
      
     
3,464
      
23.44
      
5.3       
  
$30.01-$40.00
   
269
      
33.15
      
8.0       
      
     
91
      
33.15
      
7.9       
  
   
All SARs
   
21,449
     $
18.38
      
4.4       
      
     
18,249
     $
17.50
      
3.9       
  
   
Restricted Stock Awards
The total grant-date fair value of RSAs that were released during the years ended December 31, 2019, 2018 and 2017 was $16 million, $27 million and $39 million, respectively. At December 31, 2019,
stock-based compensation expense related to outstanding RSAs not yet recognized was immaterial. The expense is expected to be recognized over an estimated remaining weighted-average period at December 31, 2019 of 1.2 years.
   
  
                    2019                    
    
2018
   
2017
 
                   
RSAs (in thousands, except per share data)
 
Shares 
    
  
Weighted-Average

  Grant-Date
  Fair Value
  Per Share
    
Shares 
    
  
Weighted-Average

  Grant-Date
  Fair Value
  Per Share
    
Shares 
    
  
Weighted-Average

  Grant-Date
  Fair Value
  Per Share
  
   
Outstanding at January 1
 
 
868
 
  
$
19.18
 
    
2,321
     $
19.72
      
4,638
     $
19.44
  
Granted
 
 
-
 
  
 
-
 
    
-
      
-
      
7
      
21.14
  
Assumed
 
 
11
 
  
 
25.48
 
    
-
      
-
      
-
      
-
  
Released
 
 
(867
)
 
 
18.91
 
    
(1,347
 )    
20.09
      
(2,063
 )    
19.10
  
Forfeited
 
 
(12
)
 
 
19.01
 
    
(106
 )    
19.40
      
(261
 )    
19.75
  
   
Outstanding at December 31
 
 
-
 
  
$
25.48
 
    
868
     $
19.18
      
2,321
     $
19.72
  
   
Restricted Stock Units
The total grant-date fair value of RSUs that were released during the years ended December 31, 2019, 2018 and 2017 was $73 million, $42 million and $21 million, respectively.
At December 31, 2019, there was $125 million of stock-based compensation expense related to outstanding RSUs not yet recognized. The expense is expected to be recognized over an estimated remaining weighted-average period at December 31, 2019 of 2.3 years.
   
  
                    2019                    
    
2018
   
2017
 
                   
RSUs (in thousands, except per unit data)
 
Units 
    
  
Weighted-Average

  Grant-Date
  Fair Value
  Per Unit
    
Units 
    
  
Weighted-Average

  Grant-Date
  Fair Value
  Per Unit
    
Units 
    
  
Weighted-Average
  
  Grant-Date  
  Fair Value  
  Per Unit  
  
   
Outstanding at January 1
 
 
8,020
 
  
$
27.04
 
    
6,986
     $
22.25
      
5,086
     $
17.84
  
Granted
 
 
4,375
 
  
 
26.68
 
    
3,674
      
32.84
      
3,652
      
26.71
  
Assumed
 
 
1,476
 
  
 
25.48
 
    
-
      
-
      
-
      
-
  
Released
 
 
(2,951
)
 
 
24.76
 
    
(1,977
 )    
21.15
      
(1,194
 )    
17.64
  
Forfeited
 
 
(914
)
 
 
27.41
 
    
(663
 )    
26.45
      
(558
 )    
21.02
  
   
Outstanding at December 31
 
 
10,006
 
  
$
27.30
 
    
8,020
     $
27.04
      
6,986
     $
22.25
  
   
The following table summarizes outstanding RSUs by grant-date fair value per unit at December 31, 2019:
   
  
            Outstanding RSUs            
  
       
RSUs (in thousands)
 
     Units     
    
  
Weighted-Average
    
  Remaining  
  Contractual Life  
(in years)
  
   
$15.01-$20.00
   
870
      
0.7          
  
$20.01-$25.00
   
243
      
0.5          
  
$25.01-$30.00
   
6,477
      
1.2          
  
$30.01-$35.00
   
2,416
      
1.6          
  
   
All RSUs
   
10,006
      
1.2          
  
   
Stock Options
There were no stock options granted during the years ended December 31, 2019, 2018 and 2017, except for replacement stock option awards
assumed
in conjunction with the MB Financial, Inc. acquisition. While the Bancorp has historically utilized the Black-Scholes option pricing model to measure the fair value of stock option grants, the fair value of these grants were measured using the Hull-White option pricing model as it was expected to provide a more precise estimate of fair value in a business combination scenario. The assumptions used in the valuation model varied for each grant tranche, but included expected volatility of
23%-29%,
no expected dividend yield, risk-free interest rates of
2.34%-2.51%,
a departure rate of 10% and exercise ratios of
2.2-2.8.
The replacement stock option awards had a weighted-average time to maturity of 5.4 years as of the date of the merger.
The total intrinsic value of stock options exercised was $7 million for the year ended December 31, 2019 and immaterial for both the years ended December 31, 2018 and 2017. Cash received from stock options exercised was $11 million for the year ended December 31, 2019 and immaterial for both the years ended December 31, 2018 and 2017. The tax benefit realized from exercised stock options was $1 million for the year ended December 31, 2019 and immaterial for the years ended December 31, 2018 and 2017. No stock options vested during the years ended December 31, 2019, 2018 or 2017. As of December 31, 2019, the aggregate intrinsic value of outstanding stock options and exercisable stock options was $15 million and $13 million, respectively.
   
  
2019
   
2018
   
2017
 
                   
Stock Options (in thousands, except per share data)
 
  Number of
Options
   
Weighted-Average

Exercise Price
Per Share
    
Number of
Options
   
Weighted-Average

Exercise Price
Per Share
    
Number of
Options
   
Weighted-Average
 
Exercise Price 
Per Share
  
   
Outstanding at January 1
 
 
-
 
  
$
-
 
    
2
     $
16.50
      
25
     $
19.17
  
Assumed
 
 
2,120
 
  
 
19.34
 
    
-
      
-
      
-
      
-
  
Exercised
 
 
(660)
 
  
 
17.36
 
    
(1)
      
8.59
      
(18)
      
14.05
  
Forfeited or expired
 
 
(79)
 
  
 
22.18
 
    
(1)
      
24.41
      
(5)
      
40.98
  
   
Outstanding at December 31
 
 
1,381
 
  
$
20.15
 
    
-
     $
-
      
2
     $
16.50
  
   
Exercisable at December 31
 
 
1,162
 
  
$
19.17
 
    
-
     $
-
      
2
     $
16.50
  
   
The following table summarizes outstanding and exercisable stock options by exercise price per share at December 31, 2019:
   
  
Outstanding Stock Options
   
   
Exercisable Stock Options
 
             
Stock Options (in thousands, except per share data)
 
Number of
Options
   
   Weighted-
    Exercise Price
Per Share
   
Weighted-
Average
Contractual Life
(in years)
   
   
Number of
Options
   
   Weighted-
   Exercise Price
Per Share
   
Weighted-
Average
Contractual Life
(in years)
 
   
Under $10.00
   
9
     $
8.62
      
6.7       
      
     
7
     $
8.52
      
6.7       
  
$10.01-$20.00
   
884
      
17.04
      
3.5       
      
     
811
      
16.91
      
3.3       
  
$20.01-$30.00
   
488
      
25.98
      
4.4       
      
     
344
      
26.14
      
2.7       
  
   
All stock options
   
1,381
     $
20.15
      
3.8       
      
     
1,162
     $
19.17
      
3.2       
  
   
Other Stock-Based Compensation
PSAs are payable contingent upon the Bancorp achieving certain predefined performance targets over the three-year measurement period and ranges from zero shares to approximately 1 million shares.
Awards granted during the years ended December 31, 2019, 2018 and 2017 will be entirely settled in stock.
The performance targets are based on the Bancorp’s performance relative to a defined peer group. PSAs use a performance-based metric based on return on tangible common equity in relation to peers. During the years ended December 31, 2019, 2018 and 2017, 328,068, 279,568 and 407,069 PSAs, respectively, were granted by the Bancorp. These awards were granted at a weighted-average grant-date fair value of $26.72, $33.15 and $26.52 per unit during the years ended December 31, 2019, 2018 and 2017, respectively.
The Bancorp sponsors an employee stock purchase plan that allows qualifying employees to purchase shares of the Bancorp’s common stock with a 15% match.
During the years ended December 31, 2019, 2018 and 2017, there were 564,061, 471,818 and 475,466 shares, respectively, purchased by participants and the Bancorp recognized stock-based compensation expense of $2 million, $2 million and $1 million in each of the respective years. As of December 31, 2019, there were 4.6 million shares available for future issuance, which represents the remaining shares of Fifth Third common stock under the Bancorp’s 1993 Stock Purchase Plan, as amended and restated, including an additional 1.5 million shares approved by shareholders on March 28, 2007 and an additional 12 million shares approved by shareholders on April 21, 2009.