INCOME TAXES

Components of Income Tax Expense

(Dollar amounts in thousands)



	Years Ended December 31,
	2016			2015		2014
Current income tax expense (benefit):
Federal	$	46,748		$	18,524	$	16,343
State	790			2,326		(1,388		)
Total	47,538			20,850		14,955
Deferred income tax (benefit) expense:
Federal	(7,786		)	12,048		7,901
State	6,419			4,849		8,314
Total	(1,367		)	16,897		16,215
Total income tax expense	$	46,171		$	37,747	$	31,170

Federal income tax expense 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 as well as state income taxes. State income tax expense and the related effective income tax rate are driven by both the amount of state tax-exempt income in relation to pre-tax income and state tax rules for consolidated/combined reporting and sourcing of income and expense.

Components of Effective Tax Rate

(Dollar amounts in thousands)



	Years Ended December 31,
	2016					2015					2014
	Amount			% of Pretax Income		Amount			% of Pretax Income		Amount			% of Pretax Income
Statutory federal income tax	$	48,482		35.0	%	$	41,934		35.0	%	$	35,167		35.0	%
(Decrease) increase in income taxes resulting from:
Tax-exempt income, net of interest expense disallowance	(5,439		)	(3.9	)	(6,752		)	(5.6	)	(7,520		)	(7.5	)
State income tax, net of federal income tax effect	4,323			3.1		4,665			3.9		4,503			4.5
Other	(1,195		)	(0.9	)	(2,100		)	(1.8	)	(980		)	(1.0	)
Total	$	46,171		33.3	%	$	37,747		31.5	%	$	31,170		31.0	%

The increase in income tax expense and the effective tax rate from the years ended December 31, 2015 to 2016 was due primarily to higher pre-tax income subject to tax at statutory rates and a decrease in tax-exempt income. The increase in income tax expense and the effective tax rate from the years ended December 31, 2014 to 2015 resulted from an increase in pre-tax income subject to tax at statutory rates, partially offset by decreases in state statutory rates.

As of December 31, 2016, 2015, and 2014, 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.

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,
	2016			2015
Deferred tax assets:
Allowance for credit losses	$	30,399		$	26,131
Deferred gain on sale-leaseback transaction	28,133			—
Unrealized losses on securities	18,320			18,328
Non-equity based compensation	6,060			3,739
Equity based compensation	5,228			5,469
OREO	4,336			2,597
Federal and state net operating loss ("NOL") carryforwards	388			7,679
Alternative minimum tax ("AMT") and other credit carryforwards	90			17,739
Property valuation adjustments	—			3,003
Other	10,997			8,375
Total deferred tax assets	103,951			93,060
Deferred tax liabilities:
Acquisition adjustments	(13,407		)	(9,371		)
Accrued retirement benefits	(6,281		)	(6,065		)
Deferred loan fees and costs	(3,172		)	(2,432		)
Cancellation of indebtedness income	(2,136		)	(3,204		)
Other	(6,442		)	(5,039		)
Total deferred tax liabilities	(31,438		)	(26,111		)
Deferred tax valuation allowance	—			—
Net deferred tax assets	72,513			66,949
Tax effect of adjustments related to other comprehensive (loss) income	27,694			19,744
Net deferred tax assets including adjustments	$	100,207		$	86,693
NOL carryforwards available to offset future taxable income:
Federal gross NOL carryforwards, begin to expire in 2035	$	574		$	922
Illinois gross NOL carryforwards, begin to expire in 2027	26,342			160,016
Indiana gross NOL carryforwards, begin to expire in 2023	1,003			11,796
AMT credits	—			17,739

During the year ended December 31, 2016, the Company recorded net deferred tax assets of $4.4 million related to the NI Bancshares acquisition and a measurement period adjustment related to finalizing the fair values of the assets acquired and liabilities assumed in the Peoples acquisition. Net deferred tax assets for the year ended December 31, 2015 includes $3.5 million of net deferred tax assets acquired from the Peoples acquisition and a measurement period adjustment related to finalizing the fair values of the assets acquired and liabilities assumed in the Great Lakes acquisition.

During the years ended December 31, 2016 and 2015, the Company transferred certain loans into Real Estate Mortgage Investment Conduit trusts which are classified as loans in the financial statements and as securities for tax purposes.

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.

Uncertainty in Income Taxes

The Company files a U.S. federal income tax return and state income tax returns in various states. Income tax returns filed by the Company are no longer subject to examination by federal and state income tax authorities for years prior to 2013.

Rollforward of Unrecognized Tax Benefits

(Dollar amounts in thousands)



	Years Ended December 31,
	2016			2015			2014
Beginning balance	$	1,408		$	912		$	279
Additions for tax positions relating to the current year	640			480			635
Additions for tax positions relating to prior years	—			37			—
Reductions for tax positions relating to prior years	(9		)	(21		)	(2		)
Ending balance	$	2,039		$	1,408		$	912
Interest and penalties not included above ⁽¹⁾:
Interest expense, net of tax effect, and penalties	$	49		$	20		$	4
Accrued interest and penalties, net of tax effect, at end of year	73			24			4


⁽¹⁾	Included in income tax expense 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 as of December 31, 2016, 2015, and 2014 are tax positions totaling $1.4 million, $936,000 and $597,000, respectively, which would favorably affect the Company's effective tax rate if recognized in future periods.