Note 13. Income Taxes

Income tax expense included in net income consisted of the following components:



	Years Ended December 31,
(in thousands)	2018		2017		2016
Included in net income
Current federal	$	7,594	$	38,859	$	43,777
Current state		5,538		4,112		1,689
Total current provision		13,132		42,971		45,466
Deferred federal		41,078		48,653		(6,127)
Deferred state		4,136		1,178		(1,712)
Total deferred provision		45,214		49,831		(7,839)
Total included in net income	$	58,346	$	92,802	$	37,627

During the year ended December 31, 2017, our deferred tax assets and liabilities were re-measured to reflect the lower income tax rate as a result of the Tax Cut and Jobs Act (“Tax Act”). ASU 2018-05 provided a measurement period not to exceed one year from the enactment date of the Tax Act to record amounts related to the impacts of the Tax Act. At December 31, 2018, the measurement period has transpired; no adjustments were deemed necessary to the provisional amounts originally recorded.

Except for the 2017 re-measurement charge of deferred tax asset related to AOCI, income tax expense does not reflect the tax effects of amounts recognized in other comprehensive income and in AOCI, a separate component of stockholders’ equity. These amounts include unrealized gains and losses on securities available for sale or transferred to held to maturity, unrealized gains and losses on derivatives and hedging transactions, and valuation adjustments of defined benefit and other post-retirement benefit plans. Refer to Note 11 – Stockholders’ Equity for additional information.

Temporary differences arise between the tax bases of assets or liabilities and their carrying amounts for financial reporting purposes. The expected tax effects from when these differences are resolved are recorded currently as deferred tax assets or liabilities.

Significant components of the Company’s deferred tax assets and liabilities were as follows:



	December 31,
(in thousands)	2018		2017
Deferred tax assets:
Allowance for loan losses	$	45,198	$	51,517
Employee compensation and benefits		12,796		9,783
Loan purchase accounting adjustments		1,132		6,441
Tax credit carryforward		2,059		21,274
Securities		17,390		12,250
State net operating loss		1,629		1,979
Other		18,431		13,763
Gross deferred tax assets		98,635		117,007
State valuation allowance		(1,629)		(1,979)
Net deferred tax assets		97,006		115,028
Deferred tax liabilities:
Fixed assets & intangibles		(44,277)		(42,597)
Lease financing		(23,605)		(12,285)
Other		(6,157)		(6,167)
Gross deferred tax liabilities		(74,039)		(61,049)
Net deferred tax asset	$	22,967	$	53,979

Reported income tax expense differed from amounts computed by applying the statutory income tax rate of 21% for the year ended December 31, 2018 and 35% for the years ended December 31, 2017 and 2016 to earnings before income taxes. The primary differences are due to tax-exempt income, federal and state tax credits, excess tax benefits from stock-based compensation (beginning January 1, 2017 following the adoption of ASU 2016-09), and for 2018, a return to provision tax benefit realized from deductions claimed on the 2017 income tax returns associated with various tax initiatives associated with fixed assets and the pension plan, among other things. The main source of tax credits has been investments in tax-advantaged securities and tax credit projects. See the table in the Income Taxes section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding federal and state tax credits. A summary of the factors that impacted income tax expense follows.



	Years Ended December 31,
	2018				2017				2016
($ in thousands)	Amount		%		Amount		%		Amount		%
Taxes computed at statutory rate	$	80,244	21.0	%	$	107,952	35.0	%	$	65,423	35.0	%
Increases (decreases) in taxes resulting from:
State income taxes, net of federal income
tax benefit		8,770	2.3			4,288	1.4			2,104	1.1
Tax-exempt interest		(10,803)	(2.8)			(18,870)	(6.1)			(14,497)	(7.8)
Bank owned life insurance		(2,019)	(0.5)			(5,360)	(1.7)			(4,833)	(2.6)
Tax credits		(11,344)	(3.0)			(9,286)	(3.1)			(10,410)	(5.6)
Employee share-based compensation		(1,380)	(0.3)			(5,824)	(1.9)			—	—
FDIC assessment disallowance		2,818	0.7			—	—			—	—
Return to provision adjustment		(9,942)	(2.6)			(120)	—			(549)	(0.3)
Impact of deferred tax asset re-measurement		—	—			19,520	6.3			—	—
Other, net		2,002	0.5			502	0.2			389	0.3
Income tax expense	$	58,346	15.3	%	$	92,802	30.1	%	$	37,627	20.1	%

As of December 31, 2018, the Company had approximately $2.1 million in state tax credit carryforwards that originated in the tax years from 2011 through 2018 and begin expiring in 2021. These carryforwards are primarily from investments in state NMTC projects.

The Company had approximately $27.6 million in state net operating loss carryforwards that originated in the tax years 2004 through 2017 and begin expiring in 2024. A valuation allowance has been established for the state net operating loss carryforwards. The impact of this valuation allowance is immaterial to the financial statements.

The tax benefit of a position taken or expected to be taken in a tax return should be recognized when it is more likely than not that the position will be sustained on its technical merits. The liability for unrecognized tax benefits was immaterial at December 31, 2018, 2017 and 2016. The Company does not expect the liability for unrecognized tax benefits to change significantly during 2019. The Company recognizes interest and penalties, if any, related to income tax matters in income tax expense, and the amounts recognized during 2018, 2017 and 2016 were insignificant.

The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various state returns. Generally, the returns for years prior to 2015 are no longer subject to examination by taxing authorities.