Fifth Third Bank 2011 Annual Report Download - page 40

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
38 Fifth Third Bancorp
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, certain gains on sales of leases
that are exempt from federal taxation and tax credits, partially offset
by the effect of nondeductible expenses. The tax credits are
associated with the Low-Income Housing Tax Credit program
established under Section 42 of the IRC, the New Markets Tax
Credit program established under Section 45D of the IRC, the
Rehabilitation Investment Tax Credit program established under
Section 47 of the IRC, and the Qualified Zone Academy Bond
program established under Section 1397E of the IRC. The effective
tax rate for the year ended December 31, 2011 was primarily
impacted by $135 million in tax credits and $26 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 year ended December 31, 2010 was
primarily impacted by $133 million in tax credits, a $26 million
reduction in income tax expense 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.
See Note 20 of the Notes to Consolidated Financial Statements for
further information on income taxes.
Deductibility of Executive Compensation
Certain sections of the IRC limit the deductibility of compensation
paid to or earned by certain executive officers of a public company.
This has historically limited the deductibility of certain executive
compensation to $1 million per executive officer, and the Bancorp’s
compensation philosophy has been to position pay to ensure
deductibility. However, both the amount of the executive
compensation that is deductible for certain executive officers and
the allowable compensation vehicles changed as a result of the
Bancorp’s participation in TARP. In particular, the Bancorp was not
permitted to deduct compensation earned by certain executive
officers in excess of $500,000 per executive officer as a result of the
Bancorp’s participation in TARP. Therefore, a portion of the
compensation earned by certain executive officers was not
deductible by the Bancorp for the period in which the Bancorp
participated in TARP. Subsequent to ending its participation in
TARP, certain limitations on the deductibility of executive
compensation will continue to apply to some forms of
compensation earned while under TARP. The Bancorp’s
Compensation Committee determined that the underlying executive
compensation programs are appropriate and necessary to attract,
retain and motivate senior executives, and that failing to meet these
objectives creates more risk for the Bancorp and its value than the
financial impact of losing the tax deduction. For the years ended
December 31, 2011 and 2010, the total tax impact for non-
deductible compensation was $2 million and $6 million, respectively.
The Bancorp’s income before income taxes, applicable income
tax expense and effective tax rate are as follows:
TABLE 12: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions) 2011 2010 2009 2008 2007
Income (loss) before income taxes $ 1,831 940 767 (2,664) 1,537
A
pplicable income tax expense (benefit) 533 187 30 (551) 461
Effective tax rate 29.1 % 19.8 3.9 20.7 30.0