Income Taxes

12 Months Ended

Dec. 31, 2019

The aggregate amount of income taxes included in the Consolidated Statements of Income and the Consolidated Statements of Equity for the years ended December 31, were as follows:



(Dollars in thousands)	2019		2018			2017
Consolidated Statements of Income:
Income tax expense/(benefit)	$	133,291	$	157,602		$	131,892
Consolidated Statements of Equity:
Income tax expense/(benefit) related to:
Net unrealized gains/(losses) on pension and other postretirement plans	4,876		(177		)	(832		)
Net unrealized gains/(losses) on securities available-for-sale	35,062		(16,054		)	(2,955		)
Net unrealized gains/(losses) on cash flow hedges	5,035		(1,360		)	(3,163		)
Total	$	178,264	$	140,011		$	124,942

The components of income tax expense/(benefit) for the years ended December 31, were as follows:



(Dollars in thousands)	2019		2018		2017
Current:
Federal	$	105,294	$	44,088	$	10,012
State	13,640		9,957		879
Deferred:
Federal	5,091		81,852		114,059
State	9,266		21,705		6,942
Total	$	133,291	$	157,602	$	131,892

The Tax Cuts and Jobs Act “Tax Act” was signed into law at the end of 2017. The Tax Act reduced the federal statutory tax rate from 35 percent to 21 percent effective January 1, 2018. FHN recorded approximately $82 million of increase in tax expense related to the effects of the Tax Act during 2017 which was primarily related to an adjustment of DTA balances to the lower federal tax rate. In 2018, FHN recorded a tax benefit of $6.7 million related to the finalization of tax items for the 2017 tax return.

A reconciliation of expected income tax expense/(benefit) at the federal statutory rate of 21 percent for 2019 and 2018, respectively, and 35 percent for 2017 to the total income tax expense follows:



(Dollars in thousands)	2019			2018			2017
Federal income tax rate	21%			21%			35%
Tax computed at statutory rate	$	122,989		$	149,963		$	108,105
Increase/(decrease) resulting from:
State income taxes, net of federal income tax benefit	15,319			24,553			4,753
Bank-owned life insurance (“BOLI”)	(4,915		)	(3,626		)	(8,401		)
401(k) – employee stock ownership plan (“ESOP”)	(764		)	(653		)	(904		)
Tax-exempt interest	(6,480		)	(6,538		)	(7,890		)
Non-deductible expenses	10,609			8,301			7,558
LIHTC credits and benefits, net of amortization	(4,419		)	(7,178		)	(5,327		)
Other tax credits	—			(2,825		)	(2,480		)
Change in valuation allowance – DTA	(74		)	(73		)	(40,473		)
Other changes in unrecognized tax benefits	4,044			6,143			46
Effect of Tax Act	—			(6,746		)	82,027
Other	(3,018		)	(3,719		)	(5,122		)
Total	$	133,291		$	157,602		$	131,892

As of December 31, 2019, FHN had net deferred tax asset balances related to federal and state income tax carryforwards of $43.8 million and $1.2 million, respectively, which will expire at various dates as follows:

A deferred tax asset (“DTA”) or deferred tax liability (“DTL”) is recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax consequence is calculated by applying enacted statutory tax rates, applicable to future years, to these temporary differences. In order to support the recognition of the DTA, FHN’s management must believe that the realization of the DTA is more likely than not. FHN evaluates the likelihood of realization of the DTA based on both positive and negative evidence available at the time, including (as appropriate) scheduled reversals of DTLs, projected future taxable income, tax planning strategies, and recent financial performance. Realization is dependent on generating sufficient taxable income prior to the expiration of the carryforwards attributable to the DTA. In projecting future taxable income, FHN incorporates assumptions including the estimated amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates used to manage the underlying business.

As of December 31, 2019, FHN's net DTA was $69.0 million compared to the $127.9 million at December 31, 2018. At December 31, 2019, FHN's gross DTA (net of a valuation allowance) and gross DTL were $250.6 million and $181.6 million, respectively. Although realization is not assured, FHN believes that it meets the more-likely-than-not requirement with respect to the net DTA after valuation allowance.

Temporary differences which gave rise to deferred tax assets and deferred tax liabilities on December 31, 2019 and 2018 were as follows:



(Dollars in thousands)	2019		2018
Deferred tax assets:
Loss reserves	$	58,251	$	65,015
Employee benefits	68,254		64,843
Accrued expenses	4,340		15,763
Lease liability	55,543		—
Federal loss carryforwards	43,774		49,821
State loss carryforwards	1,186		7,225
Investment in debt securities (ASC 320) (a)	—		24,863
Other	19,255		27,168
Gross deferred tax assets	250,603		254,698
Valuation allowance	—		(74		)
Deferred tax assets after valuation allowance	$	250,603	$	254,624
Deferred tax liabilities:
Depreciation and amortization	$	50,725	$	51,519
Investment in debt securities (ASC 320) (a)	10,154		—
Equity investments	3,656		7,705
Other intangible assets	56,352		57,632
Prepaid expenses	10,024		9,218
ROU lease asset	50,151		—
Other	540		683
Gross deferred tax liabilities	181,602		126,757
Net deferred tax assets	$	69,001	$	127,867

(a) Tax effects of unrealized gains and losses are tracked on a security-by-security basis.

The total unrecognized tax benefits (“UTB”) at December 31, 2019 and 2018, was $24.4 million and $20.2 million, respectively. To the extent such unrecognized tax benefits as of December 31, 2019 are subsequently recognized, $18.4 million of tax benefits would impact tax expense and FHN’s effective tax rate in future periods.

FHN is currently in audit in several jurisdictions. It is reasonably possible that the UTB related to federal and state exposures could decrease by $6.7 million and $.5 million, respectively during 2020 if audits are completed and settled and if the applicable statutes of limitations expire as scheduled.

FHN recognizes interest accrued and penalties related to UTB within income tax expense. FHN had approximately $2.9 million and $1.6 million accrued for the payment of interest as of December 31, 2019 and 2018, respectively. The total amount of interest and penalties recognized in the Consolidated Statements of Income during both 2019 and 2018 was an expense of $1.3 million.

The rollforward of unrecognized tax benefits is shown below:



(Dollars in thousands)
Balance at December 31, 2017	$	4,271
Increases related to prior year tax positions	16,695
Increases related to current year tax positions	1,576
Settlements	(2,080		)
Lapse of statutes	(278		)
Balance at December 31, 2018	$	20,184
Increases related to prior year tax positions	2,522
Increases related to current year tax positions	2,170
Lapse of statutes	(460		)
Balance at December 31, 2019	$	24,416

(Dollars in thousands)

Expiration Dates

Net Deferred Tax
Asset Balance

Losses-federal

Net operating losses-states

Net operating losses-states