INCOME TAXES

Income tax expense is summarized as follows:



(In millions)	2017		2016			2015
Federal:
Current	$	166	$	217		$	158
Deferred	146		(4		)	(32		)
Total Federal	312		213			126
State:
Current	24		27			14
Deferred	8		(4		)	2
Total State	32		23			16
Total	$	344	$	236		$	142

Income tax expense computed at the statutory federal income tax rate of 35% reconciles to actual income tax expense as follows:



(In millions)	2017			2016			2015

Income tax expense at statutory federal rate	$	327		$	247		$	158
State income taxes including credits, net	21			15			10
Other nondeductible expenses	3			3			3
Nontaxable income	(33		)	(25		)	(20		)
Share-based compensation	(8		)	—			—
Tax credits and other taxes	1			(2		)	(3		)
Tax Cuts and Jobs Act of 2017	47			—			—
Other	(14		)	(2		)	(6		)
Total	$	344		$	236		$	142

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (“DTA”) and deferred tax liabilities are presented below:



(In millions)	December 31,
	2017			2016
Gross deferred tax assets:
Book loan loss deduction in excess of tax	$	143		$	241
Pension and postretirement	8			19
Deferred compensation	48			87
Security investments and derivative fair value adjustments	40			57
Net operating losses, capital losses and tax credits	2			5
FDIC-supported transactions	2			5
Other	34			46
	277			460
Valuation allowance	(2		)	(4		)
Total deferred tax assets	275			456
Gross deferred tax liabilities:
Core deposits and purchase accounting	—			(1		)
Premises and equipment, due to differences in depreciation	(51		)	(8		)
Federal Home Loan Bank stock dividends	(3		)	(4		)
Leasing operations	(52		)	(75		)
Prepaid expenses	(5		)	(7		)
Prepaid pension reserves	(11		)	(17		)
Mortgage servicing	(7		)	(10		)
Subordinated debt modification	(9		)	(31		)
Deferred loan fees	(23		)	(25		)
Equity investments	(21		)	(28		)
Total deferred tax liabilities	(182		)	(206		)
Net deferred tax assets	$	93		$	250

On December 22, 2017, H.R. 1, known as the Tax Cuts and Jobs Act (“the Act”), was signed into law. The Act makes significant changes to the U.S. Internal Revenue Code of 1986, including a decrease in the current corporate federal income tax rate to 21% from 35%, effective January 1, 2018. In conjunction with the enactment of the Act, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the accounting for certain income tax effects of the Act that may not be complete by the time financial statements are issued. The Company evaluated all available information and made reasonable estimates of the impact of the Act to substantially all components of its net DTA. The provisional impact of the Act on the net DTA resulted in a non-cash charge of $47 million recorded through income tax expense. The Company anticipates that additional adjustments to net DTA and income tax expense may be made in 2018 as the Company’s initial determination of the tax basis of deferred items such as foregone interest, equity investments in flow-through entities, certain employee compensation arrangements, FDIC-supported transactions and premises and equipment are finalized. These adjustments will be recorded in the financial statements in the reporting period when such adjustments are determined; however, SAB 118 requires all impacts from the Act to be recorded prior to December 22, 2018, which is one year from the enactment date of the Act.

In 2017, the Company early adopted the guidance in ASU 2018-02, which allows reclassification from AOCI to retained earnings for the stranded tax effects related to the change in the corporate income tax rate from the Act. The early adoption of the guidance resulted in a $25 million increase to retained earnings out of AOCI as of December 31, 2017.

The amount of net DTAs is included with other assets in the balance sheet. The $2 million and $4 million valuation allowances at December 31, 2017 and 2016, respectively, were for certain acquired net operating loss carryforwards included in our acquisition of the remaining interests in a less significant subsidiary. At December 31, 2017, excluding the $2 million, the tax effect of remaining net operating loss and tax credit carryforwards was less than $1 million expiring through 2030.

We evaluate the DTAs on a regular basis to determine whether an additional valuation allowance is required. In conducting this evaluation, we have considered all available evidence, both positive and negative, based on the more likely than not criteria that such assets will be realized. This evaluation includes, but is not limited to: (1) available carryback potential to prior tax years; (2) potential future reversals of existing deferred tax liabilities, which historically have a reversal pattern generally consistent with DTAs; (3) potential tax planning strategies; and (4) future projected taxable income. Based on this evaluation, and considering the weight of the positive evidence compared to the negative evidence, we have concluded that an additional valuation allowance is not required as of December 31, 2017.

We have a liability for unrecognized tax benefits relating to uncertain tax positions for tax credits on technology initiatives. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:



(In millions)	2017		2016			2015

Balance at beginning of year	$	4	$	5		$	3
Tax positions related to current year:
Additions	1		1			1
Reductions	—		—			—
Tax positions related to prior years:
Additions	1		1			1
Reductions	—		—			—
Settlements with taxing authorities	—		—			—
Lapses in statutes of limitations	—		(3		)	—
Balance at end of year	$	6	$	4		$	5

At December 31, 2017 and 2016, the liability for unrecognized tax benefits included approximately $5 million and $3 million, respectively (net of the federal tax benefit on state issues) that, if recognized, would affect the effective tax rate. The amount of gross unrecognized tax benefits that may increase or decrease during the 12 months subsequent to December 31, 2017, is dependent on the timing and outcome of various federal and state examinations.

Interest and penalties related to unrecognized tax benefits are included in income tax expense in the statement of income. At December 31, 2017 and 2016, accrued interest and penalties recognized in the balance sheet, net of any federal and/or state tax benefits, were less than $1 million.

The Company and its subsidiaries file income tax returns in U.S. federal and various state jurisdictions. The Company is no longer subject to income tax examinations for years prior to 2013 for federal returns and 2012 for certain state returns.