Fifth Third Bank 2010 Annual Report Download - page 36

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
34 Fifth Third Bancorp
from previous acquisitions being fully amortized. Additionally, the
Bancorp recorded a $73 million reversal of the Visa litigation
reserve in 2009. The expense for representation and warranties,
which is included in losses and adjustments, totaled $110 million
and $31 million in 2010 and 2009, respectively, with the increase
resulting primarily from a higher volume of repurchase demands.
The decrease in the provision for unfunded commitments was
due to lower estimates of inherent losses resulting from a decrease
in delinquent loans as general economic conditions began to show
signs of moderation in 2010.
The Bancorp incurred $242 million of expense for FDIC
insurance and other taxes in 2010 compared to $269 million in
2009. Effective June 30, 2009, the FDIC imposed a special
assessment on each insured depository institution calculated as 5
bp of total assets less Tier 1 capital which resulted in the Bancorp
incurring a $55 million special assessment charge in the second
quarter of 2009. Due to the passage of the Dodd-Frank Act, the
FDIC was required to redefine the deposit insurance assessment
base, make changes to assessment rate methodology and
implement new DIF dividend provisions. The FDIC adopted the
final rule on February 7, 2011, that revises the risk-based
assessment system for all large insured depository institutions. The
Bancorp anticipates a decline in FDIC insurance for the year
ended December 31, 2011, compared to levels incurred for the
year ended December 31, 2010.
The efficiency ratio (noninterest expense divided by the sum
of net interest income and noninterest income) was 60.7% and
46.9% for 2010 and 2009, respectively. The increase from 2009
was driven by the Processing Business Sale which resulted in a
pre-tax gain of $1.8 billion in 2009. Excluding the gain from the
Processing Business Sale, the efficiency ratio was 60.0% for 2009.
The Bancorp continues to focus on efficiency initiatives, as part of
its core emphasis on operating leverage and on expense control.
Applicable Income Taxes
The Bancorp’s income (loss) before income taxes, applicable
income tax expense (benefit) and effective tax rate for each of the
periods indicated are shown in Table 12. Applicable income tax
expense for all periods includes the benefit from tax-exempt
income, tax-advantaged investments and general business tax
credits, partially offset by the effect of nondeductible expenses.
The effective tax rate for the tax year ended December 31, 2010
was primarily impacted by $133 million in tax credits, a $26
million tax benefit resulting from the settlement of certain
uncertain tax positions with the IRS and $25 million of non-cash
charges relating to previously recognized tax benefits associated
with stock-based compensation that will not be realized. The
effective tax rate for the tax year ended December 31, 2009 was
primarily impacted by $112 million in tax credits, a $106 million
tax benefit related to the decision to surrender one of the
Bancorp’s BOLI policies and the determination that losses on the
policy recorded in prior periods are now tax deductible, and a $55
million reduction in income tax expense related to the Bancorp’s
leveraged lease litigation settlement with the IRS. See Note 21 of
the Notes to Consolidated Financial Statements for further
information on income taxes.
TABLE 11: COMPONENTS OF OTHER NONINTEREST
EXPENSE
For the years ended December 31
($ in millions) 2010 2009 2008
FDIC insurance and other taxes $242 269 73
Loan and lease 211 234 188
Losses and adjustments 187 110 95
A
ffordable housing investments
impairment 100 83 67
Marketing 98 79 102
Professional services fees 77 63 102
Travel 51 41 54
Postal and courier 48 53 54
Intangible asset amortization 43 57 56
Insurance expense 42 50 30
Operating lease 41 39 32
OREO 33 24 11
Recruitment and education 31 30 33
Supplies 24 25 31
Data processing 24 21 14
V
isa litigation reserve -(73) (99)
Provision for unfunded commitments and
letters of credit (24) 99 98
Other 166 167 148
Total other noninterest expense $1,394 1,371 1,089
TABLE 12: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions) 2010 2009 2008 2007 2006
Income (loss) before income taxes and cumulative effect $940 767 (2,664) 1,537 1,627
A
pplicable income tax expense (benefit) 187 30 (551) 461 443
Effective tax rate 19.8% 3.9 20.7 30.0 27.2