Fifth Third Bank 2013 Annual Report Download - page 44

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
42 Fifth Third Bancorp
reduction in other taxes in the first quarter of 2012 from an
agreement reached on certain disputes for non-income tax related
assessments.
The Bancorp continues to focus on efficiency initiatives as part
of its core emphasis on operating leverage and expense control. The
efficiency ratio (noninterest expense divided by the sum of net
interest income (FTE) and noninterest income) was 58.2% for 2013
compared to 61.7% in 2012.
Applicable Income Taxes
Applicable income tax expense for all periods includes the
benefit from tax-exempt income, tax-advantaged investments,
certain gains on sales of leveraged leases that are exempt from
federal taxation, and tax credits, partially offset by the effect of
certain 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 rates for the years ended December 31, 2013
and December 31, 2012 were primarily impacted by $155 million
and $149 million, respectively, in tax credits, $9 million and $19
million, respectively, of non-cash charges relating to previously
recognized tax benefits associated with stock-based compensation
that were not realized, and $27 million and $46 million, respectively,
of tax-exempt income, which includes net interest income on tax-
exempt investments, income on life insurance policies held by the
Bancorp, and certain gains on the sale of leases that are exempt
from federal taxation.
As required under U.S. GAAP, the Bancorp established a
deferred tax asset for stock-based awards granted to its employees.
When the actual tax deduction for these stock-based awards is less
than the expense previously recognized for financial reporting or
when the awards expire unexercised, the Bancorp is required to
write-off the deferred tax asset previously established for these
stock-based awards. As a result of the expiration of certain stock
options and SARs and the lapse of restrictions on certain shares of
restricted stock during the year ended December 31, 2013, the
Bancorp recorded additional income tax expense of approximately
$9 million related to the write-off of a portion of the deferred tax
asset previously established.
As a result of the Bancorp’s stock price at December 31, 2013,
the Bancorp does not believe it will need to recognize a material
non-cash charge to income tax expense over the next twelve
months related to stock-based awards. However, the Bancorp
cannot predict its stock price or whether its employees will exercise
other stock-based awards with lower exercise prices in the future.
Therefore, it is possible the Bancorp may need to recognize a non-
cash charge to income tax expense in the future.
The Bancorp’s income before income taxes, applicable income tax expense and effective tax rate are as follows:
TABLE 12: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions) 2013 2012 2011 2010 2009
Income before income taxes $ 2,598 2,210 1,831 940 767
A
pplicable income tax expense 772 636 533 187 30
Effective tax rate 29.7 % 28.8 29.1 19.8 3.9