Fifth Third Bank 2014 Annual Report Download - page 44

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
42 Fifth Third Bancorp
interest income (FTE) and noninterest income) was 61.1% for 2014 compared to 58.2% in 2013.
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, 2014
and 2013 were primarily impacted by $164 million and $155 million,
respectively, in tax credits, $27 million of tax benefit from tax
exempt income in 2014 and 2013, respectively, and a $9 million
non-cash charge to income tax expense related to stock-based
awards during the year ended December 31, 2013. The Bancorp did
not recognize a similar non-cash charge related to stock-based
awards during the year ended December 31, 2014.
As required under U.S. GAAP, the Bancorp established a
deferred tax asset for stock-based awards granted to its employees
and directors. 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 and where the
Bancorp has not accumulated an excess tax benefit for previously
exercised or released stock-based awards, the Bancorp is required to
recognize a non-cash charge to income tax expense upon the write-
off of the deferred tax asset previously established for these stock-
based awards. As a result of the expiration of certain stock options
and SARs, the lapse of restrictions on certain shares of restricted
stock and because the Bancorp did not have an accumulated excess
tax benefit, the Bancorp was required to recognize a non-cash
charge to income tax expense of $9 million for the write-off of the
deferred tax asset previously established for these awards during the
year ended December 31, 2013. Based on the accumulated excess
tax benefit at December 31, 2014 the Bancorp was not required to
recognize a non-cash charge to income tax expense related to stock-
based awards for the year ended December 31, 2014.
Based on the Bancorp’s stock price at December 31, 2014 and
the Bancorp’s accumulation of an excess tax benefit through the
year ended December 31, 2014, the Bancorp does not believe it will
be required to recognize a non-cash charge to income tax expense
over the next twelve months related to stock-based awards.
However, the Bancorp cannot predict its stock price or whether its
employees will exercise other stock-based awards with lower
exercise prices in the future. Therefore, it is possible the Bancorp
may need to recognize a non-cash charge to income tax expense in
the future.
The Bancorp’s income before income taxes, applicable income tax expense and effective tax rate are as follows:
TABLE 15: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions) 2014 2013 2012 2011 2010
Income before income taxes $ 2,028 2,598 2,210 1,831 940
A
pplicable income tax expense 545 772 636 533 187
Effective tax rate 26.9 % 29.7 28.8 29.1 19.8