Income Taxes

12 Months Ended

Dec. 31, 2018

NOTE 16 - INCOME TAXES

The components of the Provision for income taxes included in the Consolidated Statements of Income for the years ended December 31 are presented in the following table:



(Dollars in millions)	2018			2017		2016
Current income tax provision:
Federal		$562			$129		$667
State	73			59		27
Total	635			188		694
Deferred income tax (benefit)/provision:
Federal	(122		)	275		59
State	35			69		52
Total	(87		)	344		111
Total provision for income taxes		$548			$532		$805

The 2017 Tax Act, enacted on December 22, 2017, reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Company recorded a $55 million and $303 million net income tax benefit for the effects of the 2017 Tax Act as a component of the provision for income taxes for the years ended December 31, 2018 and 2017, respectively. The $55 million adjustment completed the Company's accounting for the income tax effects of the 2017 Tax Act.

The provision for income taxes does not reflect the tax effects of unrealized gains and losses and other income and expenses recorded in AOCI, with the exception of the remeasurement of the related DTAs and DTLs due to the enactment of the 2017 Tax Act. For additional information regarding AOCI, see Note 23, “Accumulated Other Comprehensive Loss.”

A reconciliation of the income tax provision at the statutory federal income tax rate to the Company’s actual provision for income taxes and actual effective tax rate for the years ended December 31 are presented in the following table:



	2018					2017					2016
(Dollars in millions)	Amount			% of Pre-Tax Income		Amount			% of Pre-Tax Income		Amount			% of Pre-Tax Income
Income tax provision at federal statutory rate		$698		21.0	%		$982		35.0	%		$939		35.0	%
Increase/(decrease) resulting from:
State income taxes, net	85			2.6		92			3.3		59			2.2
Tax-exempt interest	(67		)	(2.0	)	(90		)	(3.2	)	(86		)	(3.2	)
Income tax credits, net of amortization ¹	(106		)	(3.2	)	(117		)	(4.2	)	(86		)	(3.2	)
Impact of the remeasurement of DTAs and DTLs and other tax reform-related items	(55		)	(1.7	)	(303		)	(10.8	)	—			—
Other ²	(7		)	(0.2	)	(32		)	(1.1	)	(21		)	(0.8	)
Total provision for income taxes and effective tax rate		$548		16.5	%		$532		19.0	%		$805		30.0	%


¹	Excludes income tax benefits of $84 million, $34 million, and $1 million for the years ended December 31, 2018, 2017, and 2016, respectively, related to tax credits, which were recognized as a reduction to the related investment asset.


²	Includes excess tax benefits of $22 million, $25 million, and $15 million for the years ended December 31, 2018, 2017, and 2016, respectively, related to the Company's adoption of ASU 2016-09.

Deferred income tax assets and liabilities result from differences between the timing of the recognition of assets and liabilities for financial reporting purposes and for income tax purposes. These assets and liabilities are measured using the enacted federal and

state tax rates expected to apply in the periods in which the DTAs or DTLs are expected to be realized. The net deferred income tax liability is recorded in Other liabilities in the Consolidated Balance Sheets.

The significant DTAs and DTLs at December 31, net of the federal impact for state taxes, are presented in the following table:



(Dollars in millions)	2018			2017
DTAs:
ALLL		$376			$412
Net unrealized losses in AOCI	438			302
State NOLs and other carryforwards	111			227
Accruals and reserves	145			180
Other	21			17
Total gross DTAs	1,091			1,138
Valuation allowance	(85		)	(143		)
Total DTAs	1,006			995
DTLs:
Leasing	475			459
Servicing rights	270			290
Employee compensation and benefits	140			210
Deferred income	29			193
Goodwill and other intangible assets	156			155
Premises, property, and equipment	149			111
Loans	96			104
Other	38			41
Total DTLs	1,353			1,563
Net DTL		($347	)		($568	)

The DTAs include state NOLs and other state carryforwards that will expire, if not utilized, in varying amounts from 2019 to 2038. At December 31, 2018 and 2017, the Company had a valuation allowance recorded against its state carryforwards and certain state DTAs of $85 million and $143 million, respectively. The decrease in the valuation allowance was due primarily to the reversal of the valuation allowance that was recorded against certain of STM's pre-merger state NOL carryforwards that could not be carried forward by the Bank after the merger. The reversal of the valuation allowance was offset by the write-off of the related state NOL carryforwards. See Note 22, “Business Segment Reporting,” for additional information regarding the merger of STM and the Bank.

The following table provides a rollforward of the Company's gross federal and state UTBs, excluding interest and penalties, during the years ended December 31:



(Dollars in millions)	2018			2017
Balance at January 1		$141			$111
Increases in UTBs related to prior years	2			22
Decreases in UTBs related to prior years	(6		)	(5		)
Increases in UTBs related to the current year	20			13
Decreases in UTBs related to settlements	(2		)	—
Decreases in UTBs related to lapse of the applicable statutes of limitations	(10		)	—
Balance at December 31		$145			$141

The amount of UTBs that would favorably affect the Company's effective tax rate, if recognized, was $113 million at December 31, 2018.

Interest and penalties related to UTBs are recorded in the Provision for income taxes in the Consolidated Statements of Income. The Company had a gross liability of $22 million and $17 million for interest and penalties related to its UTBs at December 31, 2018 and 2017, respectively. During the years ended December 31, 2018 and 2017, the Company recognized gross expenses of $5 million and $10 million, respectively, related to interest and penalties on the UTBs.

The Company files U.S. federal, state, and local income tax returns. The Company's federal income tax returns are no longer subject to examination by the IRS for taxable years prior to 2015. With limited exceptions, the Company is no longer subject to examination by state and local taxing authorities for taxable years prior to 2012. It is reasonably possible that the liability for UTBs could decrease by as much as $50 million during the next 12 months due to completion of tax authority examinations and the expiration of statutes of limitations. It is uncertain how much, if any, of this potential decrease will impact the Company’s effective tax rate.