Fifth Third Bank 2011 Annual Report Download - page 127

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 125
unrecognized tax benefit with respect to certain of the Bancorp’s
uncertain tax positions could increase or decrease during the next 12
months, the Bancorp believes it is unlikely that its unrecognized tax
benefits will change by a material amount during the next 12
months. Deferred income taxes are comprised of the following
items at December 31:
($ in millions) 2011 2010
Deferred tax assets:
Allowance for loan and lease losses $789 1,051
Deferred compensation 119 136
Impairment reserves 102 144
Reserves 70 52
Reserve for unfunded commitments 63 79
State net operating losses 63 66
Other 216 221
Total deferred tax assets $1,422 1,749
Deferred tax liabilities:
Lease financing $853 801
Investments in joint ventures and partnership interests 468 481
Other comprehensive income 253 169
MSRs 173 190
Bank premises and equipment 95 69
State deferred taxes 74 53
Other 130 130
Total deferred tax liabilities $2,046 1,893
Total net deferred tax liability $(624) (144)
Deferred tax assets are included as a component of other assets in
the Consolidated Balance Sheets and deferred tax liabilities are
included as a component of accrued taxes, interest and expenses in
the Consolidated Balance Sheets.
At December 31, 2011 and 2010, the Bancorp had recorded
deferred tax assets of $63 million and $66 million, respectively,
related to state net operating loss carryforwards. The deferred tax
assets relating to state net operating losses are presented net of
specific valuation allowances, primarily resulting from leasing
operations, of $34 million and $25 million at December 31, 2011
and 2010, respectively. If these carry forwards are not utilized, they
will expire in varying amounts through 2030. Additionally, at
December 31, 2011 and 2010, the Bancorp had federal general
business tax credit carryforwards of $5 million and $45 million,
respectively. If unused, these credit carryforwards will expire in
2031.
The Bancorp has determined that a valuation allowance is not
needed against the remaining deferred tax assets as of December 31,
2011 or 2010. The Bancorp considered all of the positive and
negative evidence available to determine whether it is more likely
than not that the deferred tax assets will ultimately be realized and,
based upon that evidence, the Bancorp believes it is more likely than
not that the deferred tax assets recorded at December 31, 2011 and
2010 will ultimately be realized. The Bancorp reached this
conclusion as the Bancorp has taxable income in the carryback
period and it is expected that the Bancorp’s remaining deferred tax
assets will be realized through the reversal of its existing taxable
temporary differences and its projected future taxable income.
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, 2011, the
Bancorp recorded additional income tax expense of approximately
$26 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
as of December 31, 2011, it is reasonably possible that the Bancorp
will be required to record an additional $21 million of income tax
expense over the next twelve months, primarily in the second
quarter of 2012. 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 that the
impact to income tax expense will be greater than or less than $21
million over the next twelve months.
The IRS concluded its audit for 2006 and 2007 during the third
quarter of 2010. As a result, all issues have been resolved with the
IRS through 2007. Further, the IRS has concluded its fieldwork on
the Bancorp’s 2008 and 2009 federal income tax returns. No
material issues were identified as a result of the IRS audit and all
significant issues have been resolved. The Bancorp anticipates that
the IRS audit of the 2008 and 2009 federal income tax returns will
be completed during 2012. The statute of limitations for the
Bancorp’s federal income tax returns remains open for tax years
2008-2011. On occasion, as various state and local taxing
jurisdictions examine the returns of the Bancorp and its subsidiaries,
the Bancorp may agree to extend the statute of limitations for a
short period of time. Otherwise, with the exception of a few states
with insignificant uncertain tax positions, the statutes of limitations
for state income tax returns remain open only for tax years in
accordance with each state’s statutes.
Any interest and penalties incurred in connection with income
taxes are recorded as a component of income tax expense in the
Consolidated Financial Statements. During the year ended
December 31, 2011, the Bancorp recognized interest expense of $1
million, net of the related tax impact related to interest and
penalties. During the year ended December 31, 2010, the Bancorp
recognized an interest benefit incurred in connection with income
taxes of $8 million, net of the related tax impact. At December 31,
2011 and 2010, the Bancorp had accrued interest liabilities, net of
the related tax benefits, of $3 million and $1 million, respectively.
No material liabilities were recorded for penalties.
Retained earnings at December 31, 2011 and 2010 included
$157 million in allocations of earnings for bad debt deductions of
former thrift subsidiaries for which no income tax has been
provided. Under current tax law, if certain of the Bancorp’s
subsidiaries use these bad debt reserves for purposes other than to
absorb bad debt losses, they will be subject to federal income tax at
the current corporate tax rate.