NOTE 14 - INCOME TAXES

The components of income tax provision included in the Consolidated Statements of Income were as follows:



	Year ended December 31
(Dollars in millions)	2012			2011			2010
Current income tax expense/(benefit):
Federal		$553			($4	)		$—
State	26			—			(14		)
Total		$579			($4	)		($14	)
Deferred income tax expense/(benefit):
Federal		$229			$81			($177	)
State	(35		)	2			6
Total	194			83			(171		)
Total income tax expense/(benefit)		$773			$79			($185	)

The income tax provision does not reflect the tax effects of unrealized gains and losses and other income and expenses recorded in AOCI. For additional information on AOCI, see Note 21, “Accumulated Other Comprehensive Income.”

A reconciliation of the expected income tax expense at the statutory federal income tax rate of 35% to the Company’s actual provision/(benefit) for income taxes and the effective tax rate is as follows:



	Year ended December 31
	2012					2011					2010
(Dollars in millions)	Amount			Percent of Pre-Tax Income		Amount			Percent of Pre-Tax Income		Amount			Percent of Pre-Tax Income ¹
Income tax expense at federal statutory rate		$956		35.0	%		$254		35.0	%		$1		35.0	%
Increase (decrease) resulting from:
Tax-exempt interest	(77		)	(2.8	)	(72		)	(9.9	)	(74		)	NM
Dividends received deduction	(8		)	(0.3	)	(14		)	(1.9	)	(13		)	NM
Income tax credits, net	(83		)	(3.0	)	(88		)	(12.1	)	(88		)	NM
State income taxes, net	(6		)	(0.2	)	2			0.2		12			NM
Completion of audit examinations by taxing authorities	—			—		—			—		(20		)	NM
Other	(9		)	(0.4	)	(3		)	(0.4	)	(3		)	NM
Total income tax expense/(benefit) and rate		$773		28.3	%		$79		10.9	%		($185	)	NM

¹"NM" - Calculated percentage was not considered to be meaningful

Deferred income tax assets and liabilities result from differences between the timing of the recognition of assets and liabilities for financial reporting purposes and for income tax return purposes. These assets and liabilities are measured using the enacted tax rates and laws that are currently in effect. The net deferred income tax liability is recorded in other liabilities in the Consolidated Balance Sheets. The significant components of the DTAs and DTLs as of December 31 were as follows:



(Dollars in millions)	2012			2011
DTAs:
Allowance for loan and lease losses		$861			$906
Accrued expenses	685			516
State NOL and other carryforwards (net of federal benefit)	209			197
Federal credits and other carryforwards	—			266
Other	173			168
Total gross DTAs	1,928			2,053
Valuation allowance	(56		)	(65		)
Total DTAs		$1,872			$1,988
DTLs:
Net unrealized gains in AOCI		$197			$995
Leasing	786			728
Compensation and employee benefits	74			100
MSRs	623			613
Loans	72			47
Goodwill and intangible assets	141			121
Fixed assets	196			177
Other	62			95
Total DTLs		$2,151			$2,876
Net DTL		($279	)		($888	)

The net DTL decreased significantly in 2012 primarily as a result of the decrease in the DTL for net unrealized gains in AOCI. The net unrealized gains had a significant decrease due to the reclassification adjustment for the realized gain on the Coke common stock in 2012.

The DTA for the federal credit and other carryforwards was utilized in 2012. The DTAs include state NOLs and other state carryforwards that will expire, if not utilized, in varying amounts from 2013 to 2032. At December 31, 2012 and 2011, the Company recorded a valuation allowance against its state carryforwards and certain state DTAs of $56 million and $65 million, respectively. The Company determined that a valuation allowance is not required for the federal and the remaining state DTAs because it is more likely than not these assets will be realized.

The following table provides a rollforward of the Company's federal and state UTBs, excluding interest and penalties, for the years ended December 31:



(Dollars in millions)	2012			2011
Balance at January 1		$133			$132
Increases in UTBs related to prior years	1			12
Decreases in UTBs related to prior years	(2		)	(12		)
Increases in UTBs related to the current year	45			8
Decreases in UTBs related to settlements	(34		)	(1		)
Decreases in UTBs related to lapse of the applicable statutes of limitations	(6		)	(6		)
Balance at December 31		$137			$133

The amount of UTBs that, if recognized, would affect the Company's effective tax rate was $92 million at December 31, 2012. The Company continually evaluates the UTBs associated with its uncertain tax positions. It is reasonably possible that the liability for UTBs could decrease during the next 12 months by up to $65 million due to completion of tax authority examinations and the expiration of statutes of limitations.

Interest related to UTBs is recorded as a component of the income tax provision. The Company had a liability of $18 million and $21 million for interest related to its UTBs at December 31, 2012 and 2011, respectively. Interest income recognized related to UTBs was approximately $3 million and less than $1 million for the years ended December 31, 2012 and 2011, respectively.

The Company files U.S. federal, state, and local consolidated and separate income tax returns. The Company's federal income tax returns are no longer subject to examination by the IRS for taxable years prior to 2006. The IRS audit of the 2006 federal income tax return is closed, but the return is still subject to examination to the extent of carryback claims. The Company's 2007 through 2009 federal income tax returns are currently under examination by the IRS. With limited exceptions, the Company is no longer subject to examination by state and local taxing authorities for taxable years prior to 2006.