Federal and State Income Taxes

The following table is a summary of consolidated income tax expense:



	Years ended
(Dollars in thousands)	December 31, 2016			December 31, 2015		December 31, 2014
Current
Federal	$	30,461		28,705		21,860
State	9,283			9,374		8,118
Total current income tax expense	39,744			38,079		29,978
Deferred ¹
Federal	(70		)	(3,451	)	5,016
State	(12		)	(629	)	915
Total deferred income tax (benefit) expense	(82		)	(4,080	)	5,931
Total income tax expense	$	39,662		33,999		35,909

__________


¹	Includes tax benefit of operating loss carryforwards of $571,000, $391,000 and $0 for the years ended December 31, 2016, 2015, and 2014, respectively.

Note 15. Federal and State Income Taxes (continued)

Combined federal and state income tax expense differs from that computed at the federal statutory corporate tax rate as follows:



	Years ended
	December 31, 2016		December 31, 2015		December 31, 2014
Federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal income tax benefit	3.8	%	3.7	%	4.0	%
Tax-exempt interest income	(12.2	)%	(12.6	)%	(11.5	)%
Tax credits	(2.1	)%	(3.0	)%	(2.8	)%
Other, net	0.2	%	(0.5	)%	(0.5	)%
Effective tax rate	24.7	%	22.6	%	24.2	%

The tax effect of temporary differences which give rise to a significant portion of deferred tax assets and deferred tax liabilities are as follows:



(Dollars in thousands)	December 31, 2016			December 31, 2015
Deferred tax assets
Allowance for loan and lease losses	$	50,172		50,123
Deferred compensation	8,320			8,166
Other real estate owned	8,309			8,380
Interest rate swap agreements	5,705			7,554
Acquisition fair market value adjustments	4,763			5,842
Net operating loss carryforwards	4,737			3,590
Employee benefits	3,927			3,165
Other	5,569			5,433
Total gross deferred tax assets	91,502			92,253
Deferred tax liabilities
Deferred loan costs	(8,061		)	(7,427	)
Intangibles	(5,477		)	(6,272	)
FHLB stock dividends	(3,976		)	(4,601	)
Depreciation of premises and equipment	(3,111		)	(2,376	)
Available-for-sale securities	(1,036		)	(8,812	)
Other	(2,720		)	(4,290	)
Total gross deferred tax liabilities	(24,381		)	(33,778	)
Net deferred tax asset	$	67,121		58,475

The Company has federal net operating loss carryforwards of $11,934,000 expiring between 2030 and 2035. The Company has Colorado net operating loss carryforwards of $14,986,000 expiring between 2031 and 2032. The net operating loss carryforwards originated from bank acquisitions. The Company has federal tax credit carryforwards with no expiration dates of $411,000.

Note 15. Federal and State Income Taxes (continued)

The Company and the Bank file consolidated income tax returns in the following jurisdictions: federal, Montana, Idaho, Colorado and Utah. Although the Bank has operations in Wyoming and Washington, neither Wyoming nor Washington imposes a corporate-level income tax. All required income tax returns have been timely filed. The following schedule summarizes the years that remain subject to examination as of December 31, 2016:



	Years ended December 31,
Federal	2013, 2014 and 2015
Montana	2013, 2014 and 2015
Idaho	2013, 2014 and 2015
Colorado	2012, 2013, 2014 and 2015
Utah	2013, 2014 and 2015

The Company had no unrecognized income tax benefits as of December 31, 2016 and 2015. The Company recognizes interest related to unrecognized income tax benefits in interest expense and penalties are recognized in other expense. Interest expense and penalties recognized with respect to income tax liabilities for the years ended December 31, 2016, 2015, and 2014 was not significant. The Company had no accrued liabilities for the payment of interest or penalties at December 31, 2016 and 2015.

The Company has assessed the need for a valuation allowance and determined that a valuation allowance was not necessary at December 31, 2016 and 2015. The Company believes that it is more-likely-than-not that the Company’s deferred tax assets will be realizable by offsetting future taxable income from reversing taxable temporary differences and anticipated future taxable income (exclusive of reversing temporary differences). In its assessment, the Company considered its strong earnings history, no history of income tax credit carryforwards expiring unused, and no future net operating losses (for tax purposes) are expected.

Retained earnings at December 31, 2016 includes $3,600,000 for which no provision for federal income tax has been made. This amount represents the base year reserve for bad debts, which is essentially an allocation of earnings to pre-1988 bad debt deductions for federal income tax purposes only. This amount is treated as a permanent difference and deferred taxes are not recognized unless it appears that this bad debt reserve will be reduced and thereby result in taxable income in the foreseeable future. The Company is not currently contemplating any changes in its business or operations which would result in a recapture of this reserve for bad debts for federal income tax purposes.