Fifth Third Bank 2008 Annual Report Download - page 89

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 87
20. STOCK-BASED COMPENSATION
The Bancorp has historically emphasized employee stock
ownership. Based on total stock-based awards outstanding and
shares remaining for future grants under the Incentive
Compensation Plan, the Bancorp’s total overhang is approximately
12%. The following table provides detail of the number of shares
to be issued upon exercise of outstanding stock-based awards and
remaining shares available for future issuance under all of the
Bancorp’s equity compensation plans as of December 31, 2008:
Plan Category (shares in thousands)
Number of Shares to Be
Issued Upon Exercise
Weighted-Average
Exercise Price
Shares Available
for Future Issuance
Equity compensation plans approved by shareholders: 23,888(b)
Stock options (a) 17,769 $52.66 (b)
Stock appreciation rights (SARs) (c) (c) (b)
Restricted stock 5,584 (d) (b)
Performance units (e) (d) (b)
Performance-based restricted stock 180 (d) (b)
Employee stock purchase plan 568(f)
Deferred stock compensation plans 161
Total shares 23,533 24,617
(a) Excludes 2.8 million outstanding options awarded under plans assumed by the Bancorp in connection with certain mergers and acquisitions. The Bancorp has not made any awards under these
plans and will make no additional awards under these plans. The weighted-average exercise price of the outstanding options is $25.47 per share.
(b) Under the 2008 Incentive Compensation Plan, 33.0 million shares of stock were authorized for issuance as incentive and nonqualified stock options, SARs, restricted stock and restricted stock
units, performance shares and performance restricted stock awards.
(c) At December 31, 2008, approximately 22.5 million SARs were outstanding at a weighted-average grant price of $35.43. The number of shares to be issued upon exercise will be determined at
vesting based on the difference between the grant price and the market price at the date of exercise.
(d) Not applicable.
(e) The number of shares to be issued is dependent upon the Bancorp achieving certain predefined performance targets and ranges from zero shares to approximately 366 thousand shares.
(f) Represents remaining shares of Fifth Third common stock under the Bancorp’s 1993 Stock Purchase Plan, as amended and restated, including an additional 1,500,000 shares approved by
shareholders on March 28, 2006.
Stock-based awards are eligible for issuance under the Bancorp’s
Incentive Compensation Plan to key employees and directors of
the Bancorp and its subsidiaries. The Incentive Compensation
Plan was approved by shareholders on April 15, 2008. The plan
has authorized the issuance of up to 33 million shares as equity
compensation and provides for incentive and nonqualified stock
options, stock appreciation rights, restricted stock and restricted
stock units, and performance share and restricted stock awards.
All of the Bancorp's stock-based awards are to be settled with
stock with the exception of a portion of the performance shares
that are to be settled in cash. The Bancorp has historically used
treasury stock to settle stock-based awards, when available. Stock
options, issued at fair market 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 fully exercisable ratably over a
three or four year period of continued employment. SARs, issued
at fair market 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 either ratably or fully over a four year
period of continued employment. The Bancorp does not grant
discounted stock options or SARs, re-price previously granted
stock options or SARs, or grant reload stock options. Restricted
stock grants vest either after four years or ratably after three, four
and five years of continued employment and include dividend and
voting rights. Performance share and performance restricted
stock awards have three-year cliff vesting terms with performance
or market conditions as defined by the plan.
Effective January 1, 2006, the Bancorp adopted SFAS No.
123(R) using the modified retrospective application basis in
accounting for stock-based compensation plans. Under SFAS
No. 123(R), the Bancorp recognizes compensation expense for
the grant-date fair value of stock-based compensation issued over
its requisite service period. The grant-date fair value of stock
options and SARs is measured using the Black-Scholes option-
pricing model. Awards with a graded vesting are expensed on a
straight-line basis.
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:
2008 2007 2006
Expected life (in years) 6 6 6
Expected volatility 30% 22% 23%
Expected dividend yield 8.7% 4.4% 4.1%
Risk-free interest rate 3.3% 4.6% 4.9%
The expected option life is derived from historical exercise
patterns and represents the amount of time that options 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. The
risk-free interest rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the
time of grant.
Stock-based compensation expense was $56 million, $63
million and $76 million for the years ended December 31, 2008,
2007 and 2006, respectively. The total related income tax benefit
recognized was $20 million, $22 million and $23 million for the
years ended December 31, 2008, 2007 and 2006, respectively. The
following tables include a summary of stock-based compensation
transactions for the previous three fiscal years:
2008 2007 2006
Stock Options (shares in thousands) Shares
Weighted-
Average
Exercise Price Shares
Weighted-
Average
Exercise Price Shares
Weighted-
Average
Exercise Price
Outstanding at January 1 23,645 $49.07 26,900 $47.58 31,546 $46.49
Granted (a) 1,133 11.57 4 40.98 - -
Exercised (202) 15.32 (2,068) 26.91 (1,931) 21.70
Forfeited or expired (4,012) 40.73 (1,191) 53.87 (2,715) 53.24
Outstanding at December 31 20,564 $48.97 23,645 $49.07 26,900 $47.58
Exercisable at December 31 20,564 $48.97 23,628 $49.07 25,978 $47.43
(a) 2008 Options granted include 1,131 options assumed as part of the First Charter Corporation acquisition completed on June 6, 2008. These options were granted under a First Charter
Corporation Plan assumed by the Bancorp.