Federal and State Income Taxes

The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017 and resulted in a decrease in the federal marginal corporate income tax rate from 35 percent to 21 percent beginning in 2018. As a result of the Tax Act, the Company incurred a one-time tax expense adjustment of $19,699,000 during 2017 due to the Company’s revaluation of the deferred tax assets and deferred tax liabilities (“net deferred tax asset”). This adjustment is reflected in the following tables.

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



	Years ended
(Dollars in thousands)	December 31, 2018		December 31, 2017	December 31, 2016
Current
Federal	$	21,510	29,555	30,461
State	11,960		9,183	9,283
Total current income tax expense	33,470		38,738	39,744
Deferred ¹
Federal	5,372		22,246	(70	)
State	1,489		3,641	(12	)
Total deferred income tax expense (benefit)	6,861		25,887	(82	)
Total income tax expense	$	40,331	64,625	39,662

______________________________


¹	Includes tax benefit of operating loss carryforwards of $443,000, $644,000 and $571,000 for the years ended December 31, 2018, 2017, and 2016, 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 income tax rate as follows:



	Years ended
	December 31, 2018		December 31, 2017		December 31, 2016
Federal statutory rate	21.0	%	35.0	%	35.0	%
State taxes, net of federal income tax benefit	4.8	%	4.6	%	3.8	%
Tax rate change	—	%	10.9	%	—	%
Tax-exempt interest income	(5.0	)%	(10.5	)%	(12.2	)%
Tax credits	(4.2	)%	(3.2	)%	(2.1	)%
Other, net	1.6	%	(1.1	)%	0.2	%
Effective income tax rate	18.2	%	35.7	%	24.7	%

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, 2018			December 31, 2017
Deferred tax assets
Allowance for loan and lease losses	$	33,313		32,890
Acquisition fair market value adjustments	6,380			4,139
Deferred compensation	6,251			5,640
Employee benefits	2,939			2,615
Net operating loss carryforwards	2,525			2,841
Available-for-sale debt securities	2,244			—
Interest rate swap agreements	955			2,379
Other real estate owned	801			5,126
Other	4,798			3,673
Total gross deferred tax assets	60,206			59,303
Deferred tax liabilities
Intangibles	(12,667		)	(4,161	)
Depreciation of premises and equipment	(10,776		)	(2,863	)
Deferred loan costs	(6,436		)	(5,854	)
FHLB stock dividends	(2,722		)	(2,602	)
Debt modification costs	(1,173		)	(1,591	)
Available-for-sale debt securities	—			(1,707	)
Other	(2,868		)	(2,181	)
Total gross deferred tax liabilities	(36,642		)	(20,959	)
Net deferred tax asset	$	23,564		38,344

The Company has federal net operating loss carryforwards of $9,337,000 expiring between 2030 and 2035. The Company has Colorado net operating loss carryforwards of $12,988,000 expiring between 2031 and 2032. The net operating loss carryforwards originated from acquisitions.

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, Utah, Colorado and Arizona. 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, 2018:



	Years ended December 31,
Federal	2015, 2016 and 2017
Montana	2015, 2016 and 2017
Idaho	2015, 2016 and 2017
Utah	2015, 2016 and 2017
Colorado	2014, 2015, 2016 and 2017
Arizona	2017

The Company had no unrecognized income tax benefits as of December 31, 2018 and 2017. 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, 2018, 2017, and 2016 was not significant. The Company had no accrued liabilities for the payment of interest or penalties at December 31, 2018 and 2017.

The Company has assessed the need for a valuation allowance and determined that a valuation allowance was not necessary at December 31, 2018 and 2017. 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 expected future net operating losses (for tax purposes).