

NOTE 12 – INCOME TAXES

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



	2016		2015		2014
	(in thousands)
Current tax expense:
Federal	$	33,872	$	34,455	$	32,957
State	1,698		2,042		1,126
	35,570		36,497		34,083
Deferred tax expense:
Federal	7,968		12,752		18,523
State	3,086		672		—
	11,054		13,424		18,523
Income tax expense	$	46,624	$	49,921	$	52,606

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



	2016		2015		2014
Statutory tax rate	35.0	%	35.0	%	35.0	%
Tax credit investments	(7.0	)	(5.2	)	(4.9	)
Tax-exempt income	(6.5	)	(6.0	)	(5.4	)
State income taxes, net of federal benefit	1.2		1.9		1.2
Bank owned life insurance	(0.6	)	(0.6	)	(0.5	)
Change in valuation allowance	0.3		(0.9	)	(0.8	)
Executive compensation	0.1		0.1		0.1
Other, net	(0.1	)	0.7		(0.3	)
Effective income tax rate	22.4	%	25.0	%	24.4	%

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:



	2016			2015
	(in thousands)
Deferred tax assets:
Allowance for credit losses	$	62,726		$	62,846
Postretirement and defined benefit plans	12,659			13,070
Unrealized holding losses on securities available for sale	12,260			3,250
Deferred compensation	12,017			11,839
State loss carryforwards	9,820			11,170
Other accrued expenses	9,520			7,142
Other-than-temporary impairment of investments	5,187			5,501
Other	8,500			10,165
Total gross deferred tax assets	132,689			124,983
Deferred tax liabilities:
Direct leasing	27,663			20,309
Mortgage servicing rights	13,369			14,582
Acquisition premiums/discounts	9,167			8,897
Premises and equipment	5,625			5,955
Intangible assets	1,810			1,614
Other	12,530			9,593
Total gross deferred tax liabilities	70,164			60,950
Net deferred tax asset, before valuation allowance	62,525			64,033
Valuation allowance	(8,950		)	(8,359		)
Net deferred tax asset	$	53,575		$	55,674

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, 2016 and 2015, the Corporation had state net operating loss carryforwards of approximately $391 million and $424 million, respectively, which are available to offset future state taxable income, and expire at various dates through 2036.

The Corporation has $5.0 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. Other deferred tax assets include $2.5 million related to realized capital losses on sales of investment securities that have not been deducted on tax returns as there were no capital gains available for offset in the current or carryback periods. These losses will begin to expire in 2018. If sufficient capital gains are not realized during this period, some or all of this deferred tax asset may need to be written off through a charge to income tax expense. 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, 2016.

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, 2016.

Uncertain Tax Positions

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



	2016			2015			2014
	(in thousands)
Balance at beginning of year	$	2,373		$	1,944		$	1,651
Prior period tax positions	—			—			188
Current period tax positions	456			492			269
Lapse of statute of limitations	(391		)	(63		)	(164		)
Balance at end of year	$	2,438		$	2,373		$	1,944

As of December 31, 2016, if recognized, all of the Corporation’s unrecognized tax benefits would impact the effective tax rate. Not included in the table above is $845,000 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 $43,000 and $46,000 in 2016 and 2015, respectively, for interest and penalties in income tax expense related to unrecognized tax positions. As of December 31, 2016 and 2015, total accrued interest and penalties related to unrecognized tax positions were approximately $574,000 and $531,000, 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 2013.