

NOTE K – INCOME TAXES

The components of the provision for income taxes are as follows:



	2011			2010		2009
	(in thousands)
Current tax expense (benefit):
Federal	$	40,141		$	38,333	$	36,162
State	6,319			532		(322		)
	46,460			38,865		35,840
Deferred tax expense (benefit):
Federal	8,662			5,544		(20,432		)
State	(4,284		)	—		—
	4,378			5,544		(20,432		)
Income tax expense	$	50,838		$	44,409	$	15,408

The differences between the effective income tax rate and the federal statutory income tax rate are as follows:



	2011		2010		2009
Statutory tax rate	35.0	%	35.0	%	35.0	%
Effect of tax-exempt income	(5.3	)	(5.8	)	(11.2	)
Effect of low income housing investments	(4.3	)	(3.3	)	(5.3	)
Bank-owned life insurance	(0.6	)	(0.6	)	(1.2	)
State income taxes, net of Federal benefit	(4.0	)	—		(0.7	)
Valuation allowance	4.6		0.2		0.5
Other, net	0.5		0.2		0.1
Effective income tax rate	25.9	%	25.7	%	17.2	%

The net deferred tax asset recorded by the Corporation is included in other assets and consists of the following tax effects of temporary differences as of December 31:



	2011			2010
	(in thousands)
Deferred tax assets:
Allowance for credit losses	$	95,788		$	96,408
Other-than-temporary impairment of investments	15,490			17,482
State loss carryforwards	12,405			8,232
Postretirement and defined benefit plans	11,527			5,588
Other accrued expenses	10,415			13,075
Deferred compensation	9,568			9,553
Other	16,262			7,476
Total gross deferred tax assets	171,455			157,814
Deferred tax liabilities:
Unrealized holding gains on securities available for sale	14,025			10,769
Mortgage servicing rights	11,776			10,745
Direct leasing	7,561			5,048
Premises and equipment	6,919			7,557
Acquisition premiums/discounts	6,174			5,069
Other	5,885			7,358
Total gross deferred tax liabilities	52,340			46,546
Net deferred tax asset before valuation allowance	119,115			111,268
Valuation allowance	(17,321		)	(8,232		)
Net deferred tax asset	$	101,794		$	103,036

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and/or capital gain income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies, such as those that may be implemented to generate capital gains, in making this assessment.

The valuation allowance relates to state deferred tax assets and net operating loss carryforwards for which realizability is uncertain. In 2011, state deferred tax assets for temporary differences and net operating losses totaling approximately $18.0 million ($11.7 million net of federal effect) were recognized due to changes in tax regulations. Valuation allowances totaling approximately $13.7 million ($8.9 million net of federal effect) were recorded for the portion of these deferred tax assets that are not considered realizable, based on estimates of future state taxable income.

As of December 31, 2011 and 2010, the Corporation had state net operating loss carryforwards of approximately $441 million and $452 million, respectively, which are available to offset future state taxable income, and expire at various dates through 2031.

The Corporation has $14.9 million of deferred tax assets resulting from other-than-temporary impairment losses on investment securities, which would be characterized as capital losses for tax purposes. If realized, the income tax benefits of these potential capital losses can only be recognized for tax purposes to the extent of capital gains generated during carryback and carryforward periods. The Corporation has the ability to generate sufficient offsetting capital gains in future periods through the execution of certain tax planning strategies, which may include the sale and leaseback of some or all of its branch and office properties.

Based on projections for future taxable income and capital gains over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Corporation will realize the benefits of its deferred tax assets, net of the valuation allowance, as of December 31, 2011.

Uncertain Tax Positions

The following summarizes the changes in unrecognized tax benefits (in thousands):



	2011			2010
	(in thousands)
Balance at beginning of year	$	4,083		$	4,481
Prior period tax positions	4,492			—
Current period tax positions	1,958			582
Lapse of statute of limitations	(1,095		)	(980		)
Balance at end of year	$	9,438		$	4,083

Virtually all of the Corporation’s unrecognized tax benefits are for positions that are taken on an annual basis on state tax returns. Increases to unrecognized tax benefits will occur as a result of accruing for the nonrecognition of the position for the current year. Decreases will occur as a result of the lapsing of the statute of limitations for the oldest outstanding year which includes the position. These offsetting increases and decreases are likely to continue in the future, including over the next twelve months. While the net effect on total unrecognized tax benefits during this period cannot be reasonably estimated, approximately $1.2 million is expected to reverse in 2012 due to lapsing of the statute of limitations.

The 2011 increase for prior period tax positions resulted from the aforementioned changes in tax regulations, which impacted the amount of positions taken in prior years that will ultimately be recognized. The Corporation expects to settle a portion of its uncertain tax positions with the taxing authorities during the next twelve months for approximately $8.0 million ($5.7 million including interest and penalties, and net of federal tax benefit).

Recognition and measurement of tax positions is based on management’s evaluations of relevant tax code and appropriate industry information about audit proceedings for comparable positions at other organizations.

As of December 31, 2011, if recognized, all of the Corporation’s unrecognized tax benefits would impact the effective tax rate. Not included in the table above is $3.6 million of federal tax expense on unrecognized state tax benefits which, if recognized, would also impact the effective tax rate. Interest accrued related to unrecognized tax benefits is recorded as a component of income tax expense. Penalties, if incurred, would also be recognized in income tax expense. The Corporation recognized approximately $563,000 of interest and penalty expense, net of reversals, in income tax expense related to unrecognized tax positions in 2011. The Corporation recognized a net benefit of approximately $25,000 and $86,000 for interest and penalties in income tax expense related to unrecognized tax positions in 2010 and 2009, respectively, as a result of reversals exceeding current period expenses. As of December 31, 2011 and 2010, total accrued interest and penalties related to unrecognized tax positions were approximately $1.4 million and $819,000, respectively.

The Corporation and its subsidiaries file income tax returns in the federal jurisdiction and various states. In most cases, unrecognized tax benefits are related to tax years that remain subject to examination by the relevant taxable authorities. With few exceptions, the Corporation is no longer subject to federal, state and local examinations by tax authorities for years before 2008