Stock Options, Restricted Stock, and Dividend Reinvestment Plans

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

Stock Options, Restricted Stock, and Dividend Reinvestment Plans

Equity compensation plans

FHN currently has one plan, its shareholder-approved Equity Compensation Plan (“ECP”), which authorizes the grant of new stock-based awards to employees and directors. Most awards outstanding at year end were granted under the ECP, though older stock options and certain deferred stock units remain outstanding under several plans which no longer are active. The ECP authorizes a broad range of award types, including restricted shares, stock units, and stock options. Stock units may be paid in shares or cash, depending upon the terms of the award. The ECP also authorizes the grant of stock appreciation rights, though no such grants have been made. Unvested awards have service and/or performance conditions which must be met in order for the shares to vest. Awards generally have service-vesting conditions, meaning that the employee must remain employed by FHN for certain periods in order for the award to vest. Some outstanding awards also have performance conditions, and one outstanding award has performance conditions associated with FHN’s stock price. FHN operates the ECP by establishing award programs, each of which is intended to cover a specific need. Programs are created, changed, or terminated as needs change. On December 31, 2019, there were 6,350,062 shares available for new awards under the ECP. The ECP imposes a separate limit on full-value (non-option) awards which is included within the overall limit; at December 31, 2019 there were 4,961,854 shares available to be granted as full-value awards.

Service condition full-value awards. Awards may be granted with service conditions only. In recent years, programs using these awards have included annual programs for executives and selected management employees, a mandatory deferral program for executives tied to annual bonuses earned, other mandatory or elective deferral programs, various retention programs, and special hiring-incentive situations. Details of the awards vary by program, but most are settled in shares at vesting rather than cash, and vesting rarely begins earlier than the first anniversary of grant and rarely extends beyond the fifth anniversary of grant. Annual programs tend to use multiple annual vesting dates while retention programs tend to use a single vesting date, but there are exceptions.

Performance condition awards. Under FHN’s long-term incentive and corporate performance programs, performance stock units (“PSUs”) (executives) and cash units (selected management employees) are granted annually and vest only if predetermined performance measures are met. The measures are changed each year based on goals and circumstances prevailing at the time of grant. In recent years the performance periods have been three years, with service-vesting near the third anniversary of the grant. PSUs granted after 2014 also have a post-vest holding period of two years. Recent annual performance awards require pro-rated forfeiture for performance falling between a threshold level and a maximum. Performance awards sometimes are used to provide a narrow, targeted incentive to a single person or small group; one such award which includes a market performance condition to FHN’s Chief Executive Officer (“CEO”) is discussed in the next paragraph. Of the annual program awards paid during 2019 or outstanding on December 31, 2019: the 2015 units vested in 2018 and remain in a two year post-vesting holding period; performance conditions related to the 2016 units were met at the 104.2 percent payout level and vested in 2019; the three years performance period of the 2017 units has ended but performance is measured relative to peers and has not yet been determined; and, the three years performance periods for the 2018 and 2019 units have not ended.

Market condition award. In 2016, FHN made a special grant of performance stock units to FHN’s CEO which will vest at the end of a performance period of seven years. The award has no provision for pro-rated payment based on partial performance. The award’s performance goal is based on achievement of a specific level of total shareholder return during the performance period.

Director awards. Non-employee directors receive cash and annual grants of service-conditioned stock units under a program approved by the board of directors. Director stock units vest in the year following the year of grant, require a payment deferral of two years, and settle in shares after the deferral period. In 2019 and 2018 each director received $65,000 or prorated equivalent of stock units, representing a portion of their annual retainer. Prior to 2005 directors could elect to defer cash compensation in the form of discount-priced stock options, some of which remain outstanding.

Stock and stock unit awards. A summary of restricted and performance stock and unit activity during the year ended December 31, 2019, is presented below:



	Shares/ Units (a)		Weighted average grant date fair value (per share) (b)
January 1, 2019	4,089,824		$	16.27
Shares/units granted	1,761,343		14.93
Shares/units vested/distributed	(1,042,270	)	13.99
Shares/units cancelled	(120,649	)	17.43
December 31, 2019	4,688,248		$	16.25


(a)	Includes only units that settle in shares and nonvested performance units are included at 100% payout level.


(b)	The weighted average grant date fair value for shares/units granted in 2018 and 2017 was $18.70 and $18.83, respectively.

On December 31, 2019, there was $29.5 million of unrecognized compensation cost related to nonvested restricted stock awards. That cost is expected to be recognized over a weighted-average period of 2.1 years. The total grant date fair value of shares vested during 2019, 2018 and 2017, was $14.6 million, $12.6 million, and $9.9 million, respectively.

Stock option awards. Currently FHN operates only a single option program, calling for annual grants of service-vested options to executives. In the past, however, option programs varied widely in their uses and terms, and many old-program options, granted under the ECP or its predecessor plans, remain outstanding today. Except for substitute options (discussed below), all options granted since 2005 provide for the issuance of FHN common stock at a price fixed at its fair market value on the grant date. Except for substitute options, converted options and a special retention stock option award to the CEO in 2016, all options granted since 2008 vest fully no later than the fourth anniversary of grant, and all such options expire 7 years from the grant date. Substitute options can be issued under the ECP in exchange for options of an acquired company that are canceled in a merger. The price, vesting, expiration, and other terms of the substitute options economically mirror those of the canceled options. Converted options from CBF are all fully vested and expire ten years from grant date. The 2016 retention award vests beginning on the fourth anniversary of grant and extends through the sixth anniversary of grant. A deferral program, which was discontinued in 2005, allowed for foregone compensation plus the exercise price to equal the fair market value of the stock on the date of grant if the grantee agreed to receive the options in lieu of compensation. Deferral options still outstanding expire 20 years from the grant date.

The summary of stock option activity for the year ended December 31, 2019, is shown below:



	Options Outstanding		Weighted Average Exercise Price (per share)		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (thousands)
January 1, 2019	5,904,687		$	16.16
Options granted	530,787		15.43
Options exercised	(895,695	)	10.79
Options expired/cancelled	(607,998	)	27.94
December 31, 2019	4,931,781		15.61		3.08	$	13,385
Options exercisable	3,347,210		15.76		2.32	10,060
Options expected to vest	1,584,571		15.28		4.68	3,325

The total intrinsic value of options exercised during 2019, 2018 and 2017 was $4.4 million, $3.0 million, and $2.5 million, respectively. On December 31, 2019, there was $1.4 million of unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted-average period of 2.5 years.

FHN granted or converted 530,787, 394,296 and 1,483,323 stock options with a weighted average fair value of $2.69, $3.89, and $4.69 per option at grant date in 2019, 2018 and 2017, respectively.

FHN used the Black-Scholes Option Pricing Model to estimate the fair value of stock options granted or converted in 2019, 2018, and 2017 with the following assumptions:



	2019	2018	2017
Expected dividend yield	3.63%	2.57%	1.82%
Expected weighted-average lives of options granted	6.24 years	6.21 years	6.09 years
Expected weighted-average volatility	24.76%	24.61%	26.90%
Expected volatility range	23.07 - 26.45%	23.95 - 25.26%	24.36 - 29.44%
Risk-free interest rate	2.53%	2.69%	2.07%

Expected lives of options granted are determined based on the vesting period, historical exercise patterns and contractual term of the options. FHN uses a blend of historical and implied volatility in determining expected volatility. A portion of the weighted average volatility rate is derived by compiling daily closing stock prices over a historical period approximating the expected lives of the options. Additionally, because of market volatility due to economic conditions and the impact on stock prices of financial institutions, FHN also incorporates a measure of implied volatility so as to incorporate more recent market conditions in the estimation of future volatility.

Compensation Cost. The compensation cost that has been included in the Consolidated Statements of Income pertaining to stock-based awards was $22.7 million, $23.2 million, and $20.6 million for 2019, 2018, and 2017, respectively. The corresponding total income tax benefits recognized were $5.6 million in 2019, $5.7 million in 2018, and $7.9 million in 2017.

Authorization. Consistent with Tennessee state law, only authorized, but unissued, stock may be utilized in connection with any issuance of FHN common stock which may be required as a result of stock based compensation awards. FHN has obtained authorization from the Board of Directors to repurchase up to certain numbers of shares related to issuance under the ECP and several older stock award plans. These authorizations are automatically adjusted for stock splits and stock dividends. Repurchases are authorized to be made in the open market or through privately negotiated transactions and will be subject to market conditions, accumulation of excess equity, legal and regulatory restrictions, and prudent capital management. FHN does not currently expect to repurchase a material number of shares under the compensation plan-related repurchase program during 2020.

Dividend reinvestment plan. The Dividend Reinvestment and Stock Purchase Plan authorizes the sale of FHN’s common stock from stock acquired on the open market to shareholders who choose to invest all or a portion of their cash dividends or make optional cash payments of $25 to $10,000 per quarter without paying commissions. The price of stock purchased on the open market is the average price paid.