Income Taxes

12 Months Ended

Dec. 31, 2019

Components of the provision for income taxes consist of the following:



	For the Years Ended December 31,
	2019			2018			2017
	(Dollars in millions)
Current
Federal	$	17		$	—		$	2
State	6			1			—
Total current income tax expense	23			1			2
Deferred
Federal	39			47			66
Federal impact of tax reform	—			—			80
State	(14		)	(3		)	—
Total deferred income tax expense	25			44			146
Total income tax expense	$	48		$	45		$	148

Our effective tax rate differs from the statutory federal tax rate. The following is a summary of such differences:



	For the Years Ended December 31,
	2019			2018			2017
	(Dollars in millions)
Provision at statutory federal income tax rate (1)	$	56		$	49		$	74
(Decreases) increases resulting from:
Bank owned life insurance	(2		)	(2		)	(3		)
State income tax (benefit), net of federal income tax effect (net of valuation allowance release)	(6		)	(2		)	—
Low income housing tax losses	(1		)	(1		)
Tax reform	—			—			80
Other	1			1			(3		)
Provision for income taxes	$	48		$	45		$	148
Effective tax provision rate	18.1		%	19.4		%	70.1		%


(1)	The statutory federal income tax rate was 21 percent for the years ended December 31, 2019 and December 31, 2018 and 35 percent for the year ended December 31, 2017.

The decrease in our income tax provision and effective tax provision rate during the year ended December 31, 2019 as compared to the year ended December 31, 2018, was primarily due to a change in our valuation allowance for net deferred tax assets at the state level.

Temporary differences and carry forwards that give rise to DTAs and liabilities are comprised of the following:



	December 31,
	2019			2018
	(Dollars in millions)
Deferred tax assets
Net operating loss carryforwards (Federal and State)	$	43		$	58
Allowance for loan losses	26			30
Accrued compensation	12			10
Litigation settlement	9			14
Lease liability	6			—
Contingent consideration	4			3
General business credits	—			7
General business reserves	2			10
Other	11			11
Total	$	113		$	143
Valuation allowance	(5		)	(14		)
Total net	$	108		$	129
Deferred tax liabilities
Mark-to-market adjustments	$	(12	)	$	(11	)
Premises and equipment	(7		)	(8		)
State and local taxes	(7		)	(3		)
Commercial lease financing	(5		)	(4		)
Mortgage loan servicing rights	(5		)	—
Right of use asset	(6		)	—
Total	$	(42	)	$	(26	)
Net deferred tax asset	$	66		$	103

We have not provided deferred income taxes for the Bank’s pre-1988 tax bad debt reserve at December 31, 2019 of approximately $4.0 million because it is not anticipated that this temporary difference will reverse in the foreseeable future. Such reserves would only be taken into taxable income if the Bank, or a successor institution, liquidates, redeems shares, pays dividends in excess of earnings, or ceases to qualify as a bank for tax purposes.

During the years ended December 31, 2019 and 2018, we had federal net operating loss carry forwards of $68 million and $154 million, respectively. These carry forwards, if unused, expire in calendar years 2028 through 2029. As a result of a change in control occurring on January 30, 2009, Section 382 of the Internal Revenue Code places an annual limitation on the use of our new operating loss carry forwards that existed at that time. At December 31, 2019 we had $68 million of net operating loss carry forwards subject to certain annual use limitations which expire in calendar years 2028 through 2029.

We regularly evaluate the need for DTA valuation allowances based on a more likely than not standard as defined by generally accepted accounting principles. The ability to realize DTAs depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction.

We had a total state DTA before valuation allowance of $35 million which includes total state net operating loss carryforwards of $454 million at December 31, 2019. In connection with our ongoing assessment of deferred taxes, we analyzed each state net operating loss separately and determined the amount of net operating loss available, estimated the amount which we expected to expire unused, and recorded a valuation allowance to reduce the DTA for state net operating losses to the amount which is more likely than not to be realized. At December 31, 2019, the net state DTAs which will more likely than not be realized, was $30 million. We have a valuation allowance of $5 million due to state loss carryover limitations.

We will continue to regularly assess the realizability of our DTAs. Changes in earnings performance and future earnings projections, among other factors, may cause us to adjust our valuation allowance.

Our income tax returns are subject to review and examination by federal, state and local government authorities. On an ongoing basis, numerous federal, state and local examinations are in progress and cover multiple tax years. At December 31,

2019, the Internal Revenue Service had completed an examination of us through the taxable year ended December 31, 2013. The years open to examination by state and local government authorities vary by jurisdiction.

We recognize interest and penalties related to uncertain tax positions in income tax expense. For the years ended December 31, 2019, 2018 and 2017, we did not recognize any interest income, interest expense, or increase or decreases to uncertain income tax positions of greater than $1 million, individually or in aggregate.