Income Taxes

12 Months Ended

Dec. 31, 2017

INCOME TAXES

Income tax expense is summarized as follows:


(In millions)	2019		2018		2017
Federal:
Current	$	195	$	210	$	166
Deferred	(1)		(1)		146
Total Federal	194		209		312
State:
Current	44		49		24
Deferred	(1)		1		8
Total State	43		50		32
Total	$	237	$	259	$	344

Income tax expense computed at the statutory federal income tax rate of 21% for both 2019 and 2018, and 35% for 2017 reconciles to actual income tax expense as follows:


(In millions)	2019		2018		2017

Income tax expense at statutory federal rate	$	221	$	240	$	327
State income taxes including credits, net	34		40		21
Other nondeductible expenses	13		15		3
Nontaxable income	(28)		(24)		(33)
Share-based compensation	(4)		(7)		(8)
Tax credits and other taxes	1		—		1
Tax Cuts and Jobs Act of 2017	—		(2)		47
Other	—		(3)		(14)
Total	$	237	$	259	$	344

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,
			2019			2018
Gross deferred tax assets:
Book loan loss deduction in excess of tax	$	137		$	137
Pension and postretirement	5			7
Deferred compensation	72			70


Security investments and derivative fair value adjustments	—			78
Net operating losses, capital losses and tax credits	—			2
Lease liabilities	61			—
Other	35			31
	310			325
Valuation allowance	—			—
Total deferred tax assets	310			325
Gross deferred tax liabilities:

Premises and equipment, due to differences in depreciation	(66)			(61)
Federal Home Loan Bank stock dividends	(2)			(2)
Leasing operations	(52)			(54)
Prepaid expenses	(6)			(6)
Prepaid pension reserves	(12)			(12)
Mortgage servicing	(7)			(8)
Security investments and derivative fair value adjustments	(17)			—
Deferred loan fees	(30)			(27)
ROU assets	(55)			—
Equity investments	(26)			(25)
Total deferred tax liabilities	(273)			(195)
Net deferred tax assets	$	37		$	130

On December 22, 2017, H.R. 1, known as the Tax Cuts and Jobs Act (“the Act”), was signed into law. The Act made 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 Bank evaluated all available information and made reasonable estimates of the impact of the Act to substantially all components of its deferred taxes. The provisional impact of the Act on the deferred taxes resulted in a noncash charge of $47 million recorded through income tax expense in 2017 related to items such as foregone interest, equity investments in flow-through entities, certain employee compensation arrangements, FDIC-supported transactions and premises and equipment.

During 2018 after filing its 2017 federal and state tax returns, the Bank finalized its analysis of all net DTAs that existed at December 31, 2017 and made a $(2) million tax benefit adjustment on net DTAs as a result of the Act. This adjustment offset the provisional amount of $47 million recognized in 2017 to deferred tax expense, resulting in an overall adjustment of $45 million to net DTAs from the Act. The Bank complied with the requirements of SAB 118 as all impacts of the Act were recognized in the financial statements prior to December 22, 2018.

In 2017, the Bank 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. There is no valuation allowance at December 31, 2019. The less than $1 million valuation allowance at December 31, 2018 was for certain acquired net operating loss carryforwards included in our acquisition of the remaining interests in a less significant subsidiary. At December 31, 2019, the tax effect of remaining net operating loss and tax credit carryforward was less than $1 million expiring through 2030.

We evaluate the DTAs on a regular basis to determine whether a 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 a valuation allowance is not required as of December 31, 2019.

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


(In millions)	2019		2018		2017

Balance at beginning of year	$	8	$	6	$	4
Tax positions related to current year:
Additions	2		1		1
Reductions	—		—		—
Tax positions related to prior years:
Additions	4		1		1
Reductions	—		—		—
Settlements with taxing authorities	—		—		—
Lapses in statutes of limitations	—		—		—
Balance at end of year	$	14	$	8	$	6

At December 31, 2019 and 2018, the liability for unrecognized tax benefits included approximately $10 million and $7 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 related to tax credits on technology initiatives that may increase or decrease during the 12 months subsequent to December 31, 2019, is dependent on the timing and outcome of various federal and state examinations that are ongoing. It is expected that an unrecognized tax benefit related to certain accrued expenses will decrease during the 12 months subsequent to December 31, 2019. The decrease in unrecognized tax benefits affecting the effective tax rate for accrued expenses is estimated to be approximately $1 million.

Interest and penalties related to unrecognized tax benefits are included in income tax expense in the statement of income. At December 31, 2019, and 2018, accrued interest and penalties recognized in the balance sheet, net of any federal and/or state tax benefits, were $1 million and less than $1 million, respectively.

The Bank files income tax returns in U.S. federal and various state jurisdictions. The Bank is no longer subject to income tax examinations for years prior to 2013 for federal and for certain state returns.