Income Taxes

12 Months Ended

Dec. 31, 2018

The current and deferred amounts of income tax expense were as follows:



	Years Ended December 31,
	2018		2017		2016
	($ in Thousands)
Current
Federal	$	20,246	$	76,525	$	73,781
State	12,593		11,576		2,885
Total current	32,839		88,101		76,666
Deferred
Federal	34,941		19,755		3,338
State	12,006		1,647		7,318
Total deferred	46,947		21,402		10,656
Total income tax expense	$	79,786	$	109,503	$	87,322

Temporary differences between the amounts reported in the financial statements and the tax bases of assets and liabilities resulted in deferred taxes. Deferred tax assets and liabilities at December 31, 2018 and 2017 were as follows:



	2018			2017
	($ in Thousands)
Deferred tax assets
Allowance for loan losses	$	61,143		$	66,377
Allowance for other losses	8,304			7,095
Accrued liabilities	3,736			3,884
Deferred compensation	24,754			20,015
Benefit of tax loss and credit carryforwards	10,126			8,438
Nonaccrual interest	1,666			1,619
Net unrealized losses on available-for-sale securities	25,731			15,968
Net unrealized losses on pension and postretirement benefits	16,640			9,928
Other	1,916			4,435
Total deferred tax assets	154,015			137,759
Valuation allowance for deferred tax assets	(251		)	(269		)
Total deferred tax assets after valuation allowance	$	153,764		$	137,490
Deferred tax liabilities
Prepaid expenses	$	61,250		$	49,695
Goodwill	20,178			19,144
Mortgage banking activities	17,428			10,949
Deferred loan fee income	11,892			11,467
State deferred taxes	518			2,001
Lease financing	410			535
Bank premises and equipment	18,655			5,063
Purchase accounting	12,414			5,015
Other	684			304
Total deferred tax liabilities	$	143,429		$	104,173
Net deferred tax assets	$	10,335		$	33,317

At December 31, 2018, the valuation allowance for deferred tax assets of approximately $251,000 was related to the deferred tax benefit of specific federal tax loss carryforwards of $3 million from the acquisition of Whitnell, while at December 31, 2017, the valuation allowance for deferred tax assets of approximately $269,000 was related to the deferred tax benefit of specific federal tax loss carryforwards of $3 million from the acquisition of Whitnell. The changes in the valuation allowance related to net operating losses for 2018 and 2017 were as follows:



	2018			2017
	($ in Thousands)
Valuation allowance for deferred tax assets, beginning of year	$	(269	)	$	—
(Increase) decrease in current year	18			(269		)
Valuation allowance for deferred tax assets, end of year	$	(251	)	$	(269	)

At December 31, 2018, the Corporation had state net operating loss carryforwards of $120 million (of which $56 million was acquired from various acquisitions) that will begin expiring in 2031. The Corporation acquired Bank Mutual in February 2018, which had federal and state net operating loss carryforwards at the time of acquisition of $5 million and $51 million, respectively. As a result of the change in control, Section 382 of the Internal Revenue Code places an annual limitation on the use of the subsidiary's net operating loss carryforwards. The Corporation does not believe these limitations will limit the usage of the acquired net operating losses. At December 31, 2018, the Corporation had state net operating loss carryforwards from the Bank Mutual acquisition of $42 million. Those state carryforwards, if unused, expire in calendar years 2031 through 2039. The acquisition also included AMT credit carryforwards of $1 million. The Corporation expects these credits to be refunded upon the filing of the 2018 federal income tax returns and has therefore included the credit as an income tax receivable at December 31, 2018.

The effective income tax rate differs from the statutory federal tax rate. The major reasons for this difference were as follows:



	2018		2017		2016
Federal income tax rate at statutory rate	21.0	%	35.0	%	35.0	%
Increases (decreases) resulting from:
Tax-exempt interest and dividends	(2.6	)%	(4.1	)%	(4.8	)%
State income taxes (net of federal benefit)	3.7	%	2.9	%	2.5	%
Bank owned life insurance	(0.7	)%	(1.7	)%	(1.7	)%
Tax effect of tax credits and benefits, net of related expenses	(0.7	)%	(0.7	)%	(1.0	)%
Tax reserve adjustments / settlements	1.5	%	(1.2	)%	0.3	%
Net tax benefit from stock-based compensation	(0.5	)%	(1.3	)%	(0.4	)%
Tax Act impact on deferred remeasurement	—	%	3.5	%	—	%
Tax planning in response to the Tax Act	(3.6	)%	—	%	—	%
FDIC premium	0.9	%	—	%	—	%
Other	0.3	%	(0.1	)%	0.5	%
Effective income tax rate	19.3	%	32.3	%	30.4	%

Included in the Corporation's income tax expense as of December 31, 2018 is a tax benefit totaling $15 million relating to tax planning strategies implemented in response to the Tax Act. Also included in the Corporation's income tax expense as of December 31, 2018 is tax expense from the settlement of the Minnesota Supreme Court Case and open Minnesota Department of Revenue examinations totaling $9 million.

Savings banks acquired by the Corporation in 1997 and 2004 qualified under provisions of the Internal Revenue Code that permitted them to deduct from taxable income an allowance for bad debts that differed from the provision for such losses charged to income for financial reporting purposes. Accordingly, no provision for income taxes has been made for $100 million of retained income at December 31, 2018. If income taxes had been provided, the deferred tax liability would have been approximately $25 million. Management does not expect this amount to become taxable in the future; therefore, no provision for income taxes has been made.

The Corporation and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Corporation’s federal income tax returns are open and subject to examination from the 2015 tax return year and forward. The years open to examination by state and local government authorities varies by jurisdiction.

A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:



	2018			2017
	($ in Millions)
Balance at beginning of year	$	4		$	10
Subtractions for tax positions related to prior years	—			(5		)
Subtractions for settlements with tax authorities	(3		)	(1		)
Additions for tax positions related to current year	1			—
Balance at end of year	$	2		$	4

At December 31, 2018 and 2017, the total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate were $1 million and $3 million, respectively.

The Corporation recognizes interest and penalties accrued related to unrecognized tax benefits in the income tax expense line of the consolidated statements of income. Interest and penalty benefits were $1 million at both December 31, 2018 and December 31, 2017. Accrued interest and penalties were negligible at December 31, 2018 compared to $1 million at December 31, 2017. Management does not anticipate significant adjustments to the total amount of unrecognized tax benefits within the next twelve months.