

NOTE 12 – INCOME TAXES

On December 22, 2017, the President signed the Tax Cuts and Jobs Act of 2017 ("Tax Act"), which among other things, lowered the U.S. corporate income tax rate from a top rate of 35% to a flat rate of 21%. The reduction of the U.S. corporate income tax rate required the Corporation to re-measure its deferred tax assets and liabilities utilizing the lower tax rate as of December 22, 2017. As of December 31, 2017, the Corporation had not completed its accounting for the tax effects of the Tax Act; however, the Corporation was able to reasonably estimate the effects of the re-measurement of its deferred tax balances and recorded a charge of $15.6 million to income tax expense.

The components of the provision for income taxes are as follows:



	2017		2016		2015
	(in thousands)
Current tax expense:
Federal	$	19,553	$	33,872	$	34,455
State	2,617		1,698		2,042
	22,170		35,570		36,497
Deferred tax expense:
Federal	39,885		7,968		12,752
State	646		3,086		672
	40,531		11,054		13,424
Income tax expense	$	62,701	$	46,624	$	49,921

The differences between the effective income tax rate and the federal statutory income tax rate are as follows:



	2017		2016		2015
Statutory tax rate	35.0	%	35.0	%	35.0	%
Tax credit investments	(7.8	)	(7.0	)	(5.2	)
Tax-exempt income	(6.6	)	(6.5	)	(6.0	)
State income taxes, net of federal benefit	(0.5	)	1.2		1.9
Bank owned life insurance	(0.4	)	(0.6	)	(0.6	)
Re-measurement of net deferred tax asset due to the Tax Act	6.7		—		—
Change in valuation allowance	1.2		0.3		(0.9	)
Executive compensation	0.1		0.1		0.1
Other, net	(1.0	)	(0.1	)	0.7
Effective income tax rate	26.7	%	22.4	%	25.0	%

The net deferred tax asset recorded by the Corporation is included in other assets and consists of the following tax effects of temporary differences as of December 31:



	2017			2016
	(in thousands)
Deferred tax assets:
Allowance for credit losses	$	40,554		$	62,726
State loss carryforwards	11,855			9,820
Deferred compensation	7,663			12,017
Postretirement and defined benefit plans	7,274			12,659
Other accrued expenses	6,977			9,520
Unrealized holding losses on securities available for sale	5,830			12,260
Other-than-temporary impairment of investments	2,045			5,187
Other	6,742			8,500
Total gross deferred tax assets	88,940			132,689
Deferred tax liabilities:
Direct leasing	21,917			27,663
Mortgage servicing rights	8,204			13,369
Acquisition premiums/discounts	6,030			9,167
Premises and equipment	3,099			5,625
Intangible assets	1,155			1,810
Other	10,420			12,530
Total gross deferred tax liabilities	50,825			70,164
Net deferred tax asset, before valuation allowance	38,115			62,525
Valuation allowance	(11,855		)	(8,950		)
Net deferred tax asset	$	26,260		$	53,575

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and/or capital gain income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, such as those that may be implemented to generate capital gains, in making this assessment.

The valuation allowance relates to state deferred tax assets and net operating loss carryforwards for which realizability is uncertain. As of December 31, 2017 and 2016, the Corporation had state net operating loss carryforwards of approximately $369 million and $391 million, respectively, which are available to offset future state taxable income, and expire at various dates through 2037.

The Corporation has $2.0 million of deferred tax assets resulting from unrealized other-than-temporary impairment losses on investment securities, which would be characterized as capital losses for tax purposes. If realized, the income tax benefits of these potential capital losses can only be recognized for tax purposes to the extent of capital gains generated during carryback and carryforward periods. The Corporation currently believes that it has the ability to generate sufficient offsetting capital gains in future periods through the execution of certain tax planning strategies, which may include the sale and leaseback of some or all of its branch and office properties. As such, no valuation allowance for the deferred tax assets related to the realized or unrealized capital losses is considered to be necessary as of December 31, 2017.

Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Corporation will realize the benefits of its deferred tax assets, net of the valuation allowance, as of December 31, 2017.

Uncertain Tax Positions

The following summarizes the changes in unrecognized tax benefits for the years ended December 31:



	2017			2016			2015
	(in thousands)
Balance at beginning of year	$	2,438		$	2,373		$	1,944
Current period tax positions	523			456			492
Lapse of statute of limitations	(411		)	(391		)	(63		)
Balance at end of year	$	2,550		$	2,438		$	2,373

As of December 31, 2017, if recognized, all of the Corporation’s unrecognized tax benefits would impact the effective tax rate. Not included in the table above is $540,000 of federal income tax benefit on unrecognized state tax benefits which, if recognized, would also impact the effective tax rate. Interest accrued related to unrecognized tax benefits is recorded as a component of income tax expense. Penalties, if incurred, would also be recognized in income tax expense. The Corporation recognized approximately $42,000 and $43,000 in 2017 and 2016, respectively, for interest and penalties in income tax expense related to unrecognized tax positions. As of December 31, 2017 and 2016, total accrued interest and penalties related to unrecognized tax positions were approximately $616,000 and $574,000, respectively.

The Corporation and its subsidiaries file income tax returns in the federal and various state jurisdictions. In most cases, unrecognized tax benefits are related to tax years that remain subject to examination by the relevant taxing authorities. With few exceptions, the Corporation is no longer subject to federal, state and local examinations by tax authorities for years before 2014.