Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

The TCJA included several changes to existing U.S. tax laws that impact us, most notably a reduction of the U.S. corporate income tax rate from 35% to 21%, which became effective January 1, 2018. We recognized the initial income tax effects of the TCJA in our 2017 Consolidated Financial Statements in accordance with SAB No. 118, which provides SEC staff guidance for the application of ASC 740, Income Taxes, in the reporting period in which the TCJA was signed into law. We recorded a provisional amount of $54.0 million at December 31, 2017 related to the remeasurement of deferred tax balances. Upon final analysis of available information and refinement of our calculations during 2018, we decreased our provisional amount by $1.9 million which is included as a component of income tax expense from continuing operations. We consider the TCJA remeasurement of our deferred taxes to be complete.

The effects of changes in tax rates on deferred tax balances are applicable even in situations in which the related income tax effects of such items were originally recognized in other comprehensive income. This results in stranded tax effects for items that were recorded in AOCI rather than in income from continuing operations. In the fourth quarter of 2017, we elected to change our accounting policy to reclassify the income tax effects related to the TCJA of approximately $14.7 million from AOCI to retained earnings. This change in accounting policy results in the appropriate tax rate being recognized in AOCI for debt and equity investments, certain derivative transactions, and pension and other post-retirement benefit plans.

Income Tax Expense

Federal and state income tax expense consist of the following:

TABLE 18.1



Year Ended December 31	2019		2018		2017
(in millions)
Current income taxes:
Federal taxes	$	47	$	41	$	26
State taxes	4		6		2
Total current income taxes	51		47		28
Deferred income taxes:
Federal taxes	30		32		128
State taxes	3		—		1
Total deferred income taxes	33		32		129
Total income taxes	$	84	$	79	$	157

The following table provides a reconciliation between the statutory tax rate and the actual effective tax rate:

TABLE 18.2



Year Ended December 31	2019		2018		2017
Statutory federal tax rate	21.0	%	21.0	%	35.0	%
State taxes, net of federal benefit	1.1		1.1		0.5
Tax-exempt interest	(2.2	)	(2.1	)	(3.3	)
Cash surrender value on BOLI	(0.5	)	(0.5	)	(1.1	)
Tax credits	(4.2	)	(2.8	)	(2.6	)
Affordable housing cost amortization, net of tax benefits	1.4		0.7		0.2
Tax Cuts and Jobs Act revaluation of net deferred tax assets	—		(0.4	)	15.2
Other items	1.1		0.6		0.2
Effective tax rate	17.7	%	17.6	%	44.1	%

The effective tax rates of 17.7% and 17.6% in 2019 and 2018, respectively, were lower than the 21% TCJA statutory federal tax rate primarily due to the tax benefits resulting from renewable energy investment and historic tax credits, tax-exempt income on investments and loans and income from BOLI. For the years ended December 31, 2019 and 2018, we recognized net investment tax credits of $7.9 million and $6.5 million, respectively.

Income tax expense related to net gains on the sale of securities is presented in the following table:

TABLE 18.3



Year Ended December 31	2019		2018		2017
(in millions)
Income tax expense related to net gains on sale of securities	$	—	$	—	$	2

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax purposes. DTAs and DTLs are measured based on the enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid.

The following table presents the tax effects of significant temporary differences that give rise to federal and state DTAs and DTLs:

TABLE 18.4



December 31	2019			2018
(in millions)
Deferred tax assets:
Allowance for credit losses	$	43		$	40
Discounts on loans acquired in a business combination	41			51
Net operating loss/tax credit carryforwards	38			43
Deferred compensation	11			10
Securities impairments	1			1
Pension and other defined benefit plans	3			5
Lease liability	29			—
Net unrealized securities losses	2			12
Other	8			9
Total	176			171
Valuation allowance	(28		)	(26		)
Total deferred tax assets	148			145
Deferred tax liabilities:
Loan costs	(15		)	(14		)
Depreciation	(19		)	(17		)
Prepaid expenses	(1		)	(1		)
Amortizable intangibles	(15		)	(16		)
Lease financing	(35		)	(18		)
Mortgage servicing rights	(9		)	(8		)
Lease ROU asset	(27		)	—
Other	(2		)	(4		)
Total deferred tax liabilities	(123		)	(78		)
Net deferred tax assets	$	25		$	67

We establish a valuation allowance when it is more likely than not that we will not be able to realize the benefit of the DTAs or when future deductibility is uncertain. Periodically, the valuation allowance is reviewed and adjusted based on management’s assessment of realizable DTAs. As of December 31, 2019, the valuation allowance of $28 million primarily relates to unused federal and state net operating loss carryforwards expiring from 2020 to 2039. We anticipate that neither the state net operating loss carryforwards nor the other net DTAs at certain of our subsidiaries will be utilized and, as such, have recorded a valuation allowance against the DTAs related to these items.

As of December 31, 2019, we had approximately $27.4 million of federal net operating loss and built-in loss carryforwards, $2.0 million of federal tax credit carryforwards, and $5.7 million of state tax credit carryforwards to which we succeeded as a result of the YDKN acquisition. The utilization of these tax attributes is subject to annual limitations under Section 382 of the Internal Revenue Code, or a similar state-level statute, which will cause the utilization of these attributes to be deferred over a number of years, not to exceed beyond 2036. We have determined that we will likely have sufficient taxable income in the years during which these tax attributes are available to be utilized and, consequently, have determined that no additional valuation allowance against the recorded DTA is warranted.

Uncertain Tax Positions

We account for uncertainties in income taxes in accordance with ASC 740, Income Taxes. At December 31, 2019 and 2018, we have approximately $1.6 million and $0.9 million, respectively, of unrecognized tax benefits related to uncertain tax positions. As of December 31, 2019, $1.4 million of these tax benefits would affect the effective tax rate if recognized. We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. To the extent interest is not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

We file numerous income tax returns in the U.S. federal jurisdiction and in several state jurisdictions. We are no longer subject to U.S. federal income tax examinations for years prior to 2016. With limited exception, we are no longer subject to state income tax examinations for years prior to 2016. We anticipate that a reduction in the unrecognized tax benefit of up to $0.06 million may occur in the next twelve months from the expiration of statutes of limitations which would result in a reduction in income taxes.