NOTE 14. INCOME TAXES

The following table presents the components of income tax expense for the years indicated:



	December 31,
	2016			2015			2014
	(In thousands)
Current Income Tax Expense:
Federal	$	(101,530	)	$	(11,950	)	$	(14,611	)
State	(52,551		)	(28,167		)	(10,823		)
Total current income tax expense	(154,081		)	(40,117		)	(25,434		)
Deferred Income Tax (Expense) Benefit:
Federal	(55,857		)	(128,436		)	(70,662		)
State	4,168			(11,964		)	(19,795		)
Total deferred income tax (expense) benefit	(51,689		)	(140,400		)	(90,457		)
Total income tax expense	$	(205,770	)	$	(180,517	)	$	(115,891	)

The following table presents a reconciliation of the recorded income tax expense to the amount of taxes computed by applying the applicable federal statutory income tax rate of 35% to earnings or loss before income taxes for the years indicated:



	December 31,
	2016			2015			2014
	(In thousands)
Computed expected income tax expense at federal statutory rate	$	(195,278	)	$	(168,047	)	$	(98,575	)
State tax expense, net of federal tax benefit	(32,896		)	(29,009		)	(15,689		)
Tax‑exempt interest benefit	13,992			8,274			4,472
Increase in cash surrender value of life insurance	1,544			884			739
Tax credits	1,439			2,441			3,567
Nondeductible employee compensation	(1,257		)	(1,005		)	(6,792		)
Nondeductible acquisition‑related expense	—			(876		)	(2,994		)
Change in unrecognized tax benefits	2,268			5,529			(157		)
Valuation allowance change	8,689			2,917			3,520
Other, net	(4,271		)	(1,625		)	(3,982		)
Recorded income tax expense	$	(205,770	)	$	(180,517	)	$	(115,891	)

We have net operating loss carryforwards for state income tax purposes and federal tax credit carryforwards that can be utilized to offset future taxable income. Upon a change in ownership of more than 50% of our capital stock over a three-year period as measured under Section 382 of the Internal Revenue Code (“the Code”), our ability to utilize our net operating loss forwards and other tax attributes after the ownership change generally could be limited. The annual limit would generally equal the product of the applicable long term tax exempt rate and the value of the relevant entity’s capital stock immediately before the ownership change.

We acquired Square 1 on October 6, 2015. As merger consideration, we issued approximately 18.1 million shares of common stock to the Square 1 stockholders. The issuance of these shares caused us to experience an ownership change under Section 382 of the Code. Consequently, the utilization of our net operating loss carryforwards, tax credits, and other tax attributes are subject to an annual limitation. While an annual limitation on the ability to utilize tax attributes resulted from the Square 1 transaction, our ability to utilize these tax attributes over time is not expected to be any less than that prior to the Square 1 transaction.

At December 31, 2016, we had no federal net operating loss carryforwards. We had available at December 31, 2016, approximately $1.1 billion of unused state net operating loss carryforwards that may be applied against future taxable income. The state net operating loss carryforwards will expire in varying amounts beginning in 2017 through 2036.

As of December 31, 2016, for federal tax purposes, we had capital loss carryforwards of $31.8 million. If not used, these carryforwards will fully expire in 2018.

As of December 31, 2016, for federal tax purposes, we had foreign tax credit carryforwards of $16.5 million. The foreign tax credit carryforwards are available to offset future federal taxable income. If not used, these carryforwards will begin to expire in 2017 and fully expire in 2021.

The following table presents the tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities as of the dates indicated:



	December 31,
	2016			2015
	(In thousands)
Deferred Tax Assets:
Book allowance for loan losses in excess of tax specific charge-offs	$	81,380		$	97,385
Interest on nonaccrual loans	7,485			5,100
Deferred compensation	3,148			4,027
Premises and equipment, principally due to differences in depreciation	7,395			5,867
Foreclosed assets valuation allowance	5,546			6,479
Assets acquired in FDIC‑assisted acquisitions	—			2,319
State tax benefit	7,187			6,101
Net operating losses	57,416			125,678
Capital loss carryforwards	17,740			35,597
Accrued liabilities	43,366			40,733
Unrealized loss from FDIC‑assisted acquisitions	7,207			—
Tax mark-to-market	11,793			—
Equity investments	15,195			16,712
Goodwill	29,996			37,423
Tax credits	16,493			35,874
Gross deferred tax assets	311,347			419,295
Valuation allowance	(100,920		)	(121,138		)
Deferred tax assets, net of valuation allowance	210,427			298,157
Deferred Tax Liabilities:
Core deposit and customer relationship intangibles	12,792			19,122
Deferred loan fees and costs	13,389			16,283
Unrealized gain on securities available‑for‑sale	4,118			19,224
FHLB stock	1,098			1,067
Subordinated debentures	37,499			39,242
Operating leases	41,785			40,029
Unrealized income from FDIC‑assisted acquisitions	—			7,543
Tax mark-to-market	—			17,087
Other	5,634			12,171
Gross deferred tax liabilities	116,315			171,768
Total net deferred tax asset	$	94,112		$	126,389

Based upon our taxpaying history and estimates of taxable income over the years in which the items giving rise to the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences.

The Company had net income taxes payable of $7.4 million at December 31, 2016 and net income taxes receivable of $6.2 million at December 31, 2015.

As of December 31, 2016 and 2015, the Company had a valuation allowance of $100.9 million and $121.1 million against acquired DTA. Periodic reviews of the carrying amount of DTA are made to determine if a valuation allowance is necessary. A valuation allowance is required, based on available evidence, when it is more likely than not that all or a portion of a DTA will not be realized due to the inability to generate sufficient taxable income in the period and/or of the character necessary to utilize the benefit of the DTA. All available evidence, both positive and negative, that may affect the realizability of the DTA is identified and considered in determining the appropriate amount of the valuation allowance. It is more likely than not that these deferred tax assets subject to a valuation allowance will not be realized primarily due to their character and/or the expiration of the carryforward periods.

The net reduction in the total valuation allowance during 2016 was $20.2 million. Of this amount, $8.7 million impacted the effective tax rate. The remaining $11.5 million principally consisted of adjustments to deferred tax assets for tax attributes that expired in 2016. These deferred tax assets had been subjected to a full valuation allowance because the Company had previously determined that they were more likely than not to not be utilized. As a result, the expiration of the tax attributes supporting the $11.5 million of deferred tax assets had no impact on the Company’s effective tax rate for the year ended December 31, 2016.

The following table summarizes the activity related to the Company's unrecognized tax benefits for the years indicated:



	Year Ended December 31,
Unrecognized Tax Benefits:	2016			2015
	(In thousands)
Balance, beginning of year	$	15,155		$	20,501
Increase based on tax positions related to prior years	17,099			6,839
Reductions for tax positions related to prior years	(1,901		)	(4,789		)
Reductions related to settlements	(19,833		)	(6,640		)
Reductions for tax positions as a result of a lapse of the applicable statute of limitations	(535		)	(756		)
Balance, end of year	$	9,985		$	15,155

As of December 31, 2016 and 2015, our unrecognized tax benefits that, if recognized, would affect the effective tax rate were $1.1 million and $4.3 million. Due to the potential for the resolution of federal and state examinations and the expiration of various statutes of limitations, it is reasonably possible that our gross unrecognized tax benefits may decrease within the next twelve months by as much as $0.8 million.

We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. For the year ended December 31, 2016, we reduced our accrual for interest expense and penalties and recognized $0.6 million in income related to these items. For the year ended December 31, 2015, we reduced our accrual for interest expense and penalties and recognized $2.4 million in income related to these items. For the year ended December 31, 2014, we accrued and recognized $0.2 million in interest expense and penalties. We had $0.3 million and $0.9 million accrued for the payment of interest and penalties as of December 31, 2016 and 2015.

We file federal and state income tax returns with the Internal Revenue Service ("IRS") and various state and local jurisdictions and generally remain subject to examinations by these tax jurisdictions for tax years 2009 through 2015. We are currently under examination by the IRS for tax years 2009 through 2012 and certain state jurisdictions for tax years 2009 through 2014.