Following is a summary of the major items comprising the differences in taxes from continuing operations computed at the federal statutory rate and as recorded in the consolidated statement of income:

	Years Ended December 31,
(dollars in thousands)	2018				2017				2016
Provision at statutory rate (1)	$	43,823			$	59,032			$	70,149
Tax-exempt income:
Tax-exempt interest		(9,021	)			(15,026	)			(14,356	)
Section 291/265 interest disallowance		321				289				191
Company-owned life insurance income		(2,223	)			(3,029	)			(2,968	)
Tax-exempt income		(10,923	)			(17,766	)			(17,133	)
State income taxes		5,621				998				3,461
Tax credit investments - federal		(21,576	)			(8,500	)			(321	)
Revaluation of deferred tax assets		—				39,300				—
ONB Insurance Group, Inc. nondeductible goodwill		—				—				8,328
Other, net		905				(125	)			1,678
Income tax expense	$	17,850			$	72,939			$	66,162
Effective tax rate		8.6		%		43.3		%		33.0		%

The lower effective tax rate in 2018 when compared 2017 is primarily the result of the lowering of the federal corporate tax rate to 21% in 2018 and an increase in federal tax credits available.

The higher effective tax rate in 2017 when compared to 2016 was the result of $39.3 million of additional tax expense in 2017 to estimate the revaluation of deferred tax assets due to the lowering of the federal corporate tax rate to 21%, partially offset by an increase in federal tax credits available. On December 22, 2017, the Tax Cuts and Jobs Act (“H.R. 1”) was enacted into legislation. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. Accordingly, Old National recorded an estimated $39.3 million for the revaluation of Old National’s deferred tax assets.

Shortly after the enactment date, the SEC issued Staff Accounting Bulletin (“SAB”) 118, which addresses the situations where the accounting for changes in tax laws is complete, incomplete but can be reasonably estimated, and incomplete and cannot be reasonably estimated. SAB 118 also permits a measurement period of up to one year from the date of enactment to refine the provisional accounting. Old National completed its analysis of H.R. 1 during the second quarter of 2018 and there were immaterial adjustments made to the revaluation of Old National’s deferred tax assets.

The provision for income taxes consisted of the following components for the years ended December 31:

	Years Ended December 31,
(dollars in thousands)	2018			2017		2016
Income taxes currently payable:
Federal	$	12,256		$	—	$	23,735
State		4,601			—		2,242
Deferred income taxes related to:
Federal		(1,513	)		31,915		35,955
Revaluation of deferred tax assets		—			39,300		—
State		2,506			1,724		4,230
Deferred income tax expense		993			72,939		40,185
Income tax expense	$	17,850		$	72,939	$	66,162

Significant components of net deferred tax assets (liabilities) were as follows at December 31:

(dollars in thousands)	2018			2017
Deferred Tax Assets
Allowance for loan losses, net of recapture	$	14,514		$	12,958
Benefit plan accruals		21,694			11,080
Alternative minimum tax credit		2,545			25,084
Unrealized losses on benefit plans		61			108
Net operating loss carryforwards		31,765			39,631
Federal tax credits		1,779			5,516
Deferred gain on securities		1,976			—
Other-than-temporary impairment		37			1,424
Acquired loans		26,956			29,669
Lease exit obligation		1,025			1,337
Unrealized losses on available-for-sale investment securities		11,853			14,011
Unrealized losses on held-to-maturity investment securities		2,497			3,630
Unrealized losses on hedges		—			923
Tax credit investments		662			—
Other real estate owned		144			369
Other, net		5,471			829
Total deferred tax assets		122,979			146,569
Deferred Tax Liabilities
Accretion on investment securities		(595	)		(493	)
Purchase accounting		(18,100	)		(16,718	)
Loan servicing rights		(6,141	)		(6,058	)
Premises and equipment		(8,507	)		(10,052	)
Prepaid expenses		(681	)		(1,277	)
Tax credit investments		—			(168	)
Unrealized gains on hedges		(358	)		—
Other, net		(1,549	)		(946	)
Total deferred tax liabilities		(35,931	)		(35,712	)
Net deferred tax assets	$	87,048		$	110,857

Through the acquisition of Anchor (WI) in the second quarter of 2016 and Lafayette Savings Bank in the fourth quarter of 2014, both former thrifts, Old National Bank’s retained earnings at December 31, 2018 include base-year

bad debt reserves, created for tax purposes prior to 1988, totaling $52.8 million. Of this total, $50.9 million was acquired from Anchor (WI), and $1.9 million was acquired from Lafayette Savings Bank. Base-year reserves are subject to recapture in the unlikely event that Old National Bank (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes, (2) redeems its stock, or (3) liquidates. Old National Bank has no intention of making such a nondividend distribution. Accordingly, under current accounting principles, a related deferred income tax liability of $13.0 million has not been recognized.

No valuation allowance was recorded at December 31, 2018 or 2017 because, based on current expectations, Old National believes it will generate sufficient income in future years to realize deferred tax assets. Old National has federal net operating loss carryforwards totaling $104.5 million at December 31, 2018 and $130.7 million at December 31, 2017. This federal net operating loss was acquired from the acquisition of Anchor (WI) in 2016. If not used, the federal net operating loss carryforwards will expire from 2028 to 2033. Old National has alternative minimum tax credit carryforwards totaling $10.1 million at December 31, 2018 and $25.1 million at December 31, 2017. The enactment of H.R.1 eliminates the parallel tax system known as the alternative minimum tax and allows any existing alternative minimum tax credits to be used to reduce regular tax or be refunded from 2018 to 2021. ASC 740 allows for the reclassification of the alternative minimum tax credit from a deferred tax asset to a current tax asset, except for the amount limited by section 382. Old National has $2.5 million of alternative minimum tax credit carryforward subject to section 382 limitations. The $2.5 million is maintained in deferred tax assets and the remaining $21.5 million has been reclassified to a current tax asset. Old National has federal tax credit carryforwards of $1.8 million at December 31, 2018 and $5.5 million at December 31, 2017. The federal tax credits consist mainly of energy efficient home credits, low income housing credits, and research and development credits that, if not used, will expire from 2025 to 2038. Old National has recorded state net operating loss carryforwards totaling $165.6 million at December 31, 2018 and $203.6 million at December 31, 2017. If not used, the state net operating loss carryforwards will expire from 2024 to 2033.

The federal and recorded state net operating loss carryforwards are subject to an annual limitation under Internal Revenue Code section 382. Old National believes that all of the recorded net operating loss carryforwards will be used prior to expiration.

Unrecognized state income tax benefits are reported net of their related deferred federal income tax benefit.

A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:

	Years Ended December 31,
(dollars in thousands)	2018			2017			2016
Balance at beginning of period	$	874		$	777		$	124
Additions based on tax positions related to the current year		—			162			118
Additions (reductions) based on tax positions related to prior years		(78	)		—			537
Reductions due to statute of limitations expiring		(301	)		(173	)		(2	)
Revaluation due to Tax Reform		—			108			—
Balance at end of period	$	495		$	874		$	777

If recognized, approximately $0.5 million of unrecognized tax benefits, net of interest, would favorably affect the effective income tax rate in future periods. Old National expects the total amount of unrecognized tax benefits to be reduced to zero in the next twelve months.

It is our policy to recognize interest and penalties accrued relative to unrecognized tax benefits in their respective federal or state income tax accounts. We did not recognize any interest and penalties in 2018. We recorded interest and penalties in the income statement of $10 thousand in 2017 and $0.1 million in 2016. The amount accrued for interest and penalties in the balance sheet was $0.1 million at December 31, 2018 and 2017.

Old National and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various state returns. The 2015 through 2018 tax years are open and subject to examination.

Old National reversed $0.4 million in 2018 related to uncertain tax positions accounted for under FASB ASC 740-10 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes) (“ASC Topic 740-10”). The income tax reversal related to the 2014 statute of limitations expiring in the third quarter of 2018 totaled $0.3 million. The

income tax reversal related to reductions for tax positions in prior years totaled $0.1 million. As a result, Old National reversed a total of $0.4 million from its unrecognized tax benefit liability.