INCOME TAXES

Components of Income Tax Expense (Benefit)

(Dollar amounts in thousands)



	Years Ended December 31,
	2014			2013		2012
Current income tax expense:
Federal	$	16,343		$	4,744	$	—
State	(1,388		)	10,504		1
Total	14,955			15,248		1
Deferred income tax expense (benefit):
Federal	7,901			31,572		(23,728		)
State	8,314			1,895		(5,155		)
Total	16,215			33,467		(28,883		)
Total income expense (benefit)	$	31,170		$	48,715	$	(28,882	)

Federal income tax expense (benefit) and the related effective income tax rate are influenced by the amount of tax-exempt income derived from investment securities and BOLI in relation to pre-tax income (loss) and state income taxes. State income tax expense (benefit) and the related effective income tax rate are driven by the amount of state tax-exempt income in relation to pre-tax income (loss) and state tax rules for consolidated/combined reporting and sourcing of income and expense.

Income tax expense totaled $31.2 million for the year ended December 31, 2014 compared to income tax expense of $48.7 million for the year ended December 31, 2013 and an income tax benefit of $28.9 million for the year ended December 31, 2012. The decrease in income tax expense in 2014 was driven primarily by a decrease in income subject to tax at statutory rates. The increase in income tax expense from 2012 to 2013 was the result of an increase in income subject to tax at statutory rates and to a non-deductible BOLI modification loss recorded in 2013.

Differences between the amounts reported in the consolidated financial statements and the tax basis of assets and liabilities result in temporary differences for which deferred tax assets and liabilities were recorded.

Deferred Tax Assets and Liabilities

(Dollar amounts in thousands)



	As of December 31,
	2014			2013
Deferred tax assets:
Alternative minimum tax ("AMT") and other credit carryforwards	$	29,007		$	19,184
Federal net operating loss ("NOL") carryforwards	—			14,579
Allowance for credit losses	26,078			30,492
Unrealized losses on securities	18,527			21,374
OREO	3,480			6,541
State NOL carryforwards	11,917			15,859
Other	18,390			19,049
Total deferred tax assets	107,399			127,078
Deferred tax liabilities:
Purchase accounting adjustments and intangibles	(11,181		)	(16,977		)
Accrued retirement benefits	(6,732		)	(7,095		)
Depreciation	(845		)	(2,111		)
Cancellation of indebtedness income	(4,272		)	(5,340		)
Other	(3,978		)	(6,313		)
Total deferred tax liabilities	(27,008		)	(37,836		)
Deferred tax valuation allowance	—			—
Net deferred tax assets	80,391			89,242
Tax effect of adjustments related to other comprehensive income (loss)	11,294			18,382
Net deferred tax assets including adjustments	$	91,685		$	107,624
Net operating loss carryforwards available to offset future taxable income:
Federal gross NOL carryforwards, begin to expire in 2032	$	—		$	41,654
Illinois gross NOL carryforwards, begin to expire in 2021	232,834			290,076
Indiana gross NOL carryforwards, begin to expire in 2022	17,192			16,112
Alternative minimum tax credits	25,739			16,090
Other credits, begin to expire in 2028	3,268			3,094

Included in the net deferred tax assets balance at December 31, 2014 are $7.4 million of net deferred tax assets acquired from the Popular, National Machine Tool, and Great Lakes transactions.

Net deferred tax assets are included in other assets in the accompanying Consolidated Statements of Financial Condition. Management believes that it is more likely than not that net deferred tax assets will be fully realized and no valuation allowance is required.

Components of Effective Tax Rate



	Years Ended December 31,
	2014		2013		2012
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
Tax-exempt income, net of interest expense disallowance	(7.5	)%	(6.2	)%	16.8	%
State income tax, net of federal income tax effect	4.5	%	6.4	%	7.0	%
Net other	(1.0	)%	2.9	%	(1.0	)%
Effective tax rate	31.0	%	38.1	%	57.8	%

The change in effective tax rate from the year ended December 31, 2013 to the year ended December 31, 2014 was the result of a decrease in income subject to tax at statutory rates. The change in effective tax rate from the year ended December 31, 2012 to the year ended December 31, 2013 was the result of an increase in income subject to tax at statutory rates and a non-deductible BOLI modification loss recorded in 2013.

As of December 31, 2014, 2013, and 2012, the Company's retained earnings included an appropriation for an acquired thrift's tax bad debt reserves of approximately $2.5 million for which no provision for federal or state income taxes has been made. If, in the future, this portion of retained earnings were distributed as a result of the liquidation of the Company or its subsidiaries, federal and state income taxes would be imposed at the then applicable rates.

Uncertainty in Income Taxes

The Company files a U.S. federal income tax return and state income tax returns in various states. In 2012, the Internal Revenue Service completed audits of the Company's 2006-2010 federal income tax returns and Illinois completed audits of the Company's 2008-2009 Illinois income tax returns. No significant adjustments were proposed in these audits.

Federal income tax returns filed by the Company are no longer subject to examination by federal income tax authorities for years prior to 2011. The Company is no longer subject to examination by Illinois, Indiana, Iowa and Wisconsin tax authorities for years prior to 2011.

Rollforward of Unrecognized Tax Benefits

(Dollar amounts in thousands)



	Years Ended December 31,
	2014			2013		2012
Beginning balance	$	279		$	—	$	368
Additions for tax positions relating to the current year	635			279		—
Reductions for tax positions relating to prior years	(2		)	—		—
Reductions for settlements with taxing authorities	—			—		(368		)
Ending balance	$	912		$	279	$	—
Interest and penalties not included above ⁽¹⁾:
Interest (benefit) expense, net of tax effect, and penalties	$	4		$	—	$	(52	)
Accrued interest and penalties, net of tax effect, at end of year	4			—		—


⁽¹⁾	Included in income tax expense (benefit) in the Consolidated Statements of Income.

The Company does not anticipate that the amount of uncertain tax positions will significantly increase or decrease in the next 12 months. Included in the balance at December 31, 2014 and 2013 are tax positions totaling $597,000 and $181,000, respectively, that would favorably affect the Company's effective tax rate if recognized in future periods.