NOTE 13. INCOME TAXES

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



	December 31,
	2017		2016			2015
	(In thousands)
Current Income Tax Expense:
Federal	$	74,769	$	101,530		$	11,950
State	38,933		52,551			28,167
Total current income tax expense	113,702		154,081			40,117
Deferred Income Tax Expense (Benefit):
Federal	63,463		55,857			128,436
State	19,748		(4,168		)	11,964
Total deferred income tax expense	83,211		51,689			140,400
Total income tax expense	$	196,913	$	205,770		$	180,517

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,
	2017			2016			2015
	(In thousands)
Computed expected income tax expense at federal statutory rate	$	194,156		$	195,278		$	168,047
State tax expense, net of federal tax benefit	33,729			32,896			29,009
Tax‑exempt interest benefit	(15,510		)	(13,992		)	(8,274		)
Increase in cash surrender value of life insurance	(1,853		)	(1,544		)	(884		)
Tax credits	(2,054		)	(1,439		)	(2,441		)
Nondeductible employee compensation	1,781			1,257			1,005
Nondeductible acquisition‑related expense	1,608			—			876
Change in unrecognized tax benefits	1,157			(2,268		)	(5,529		)
Valuation allowance change	(13,071		)	(8,689		)	(2,917		)
Federal rate change	(1,156		)	—			—
Other, net	(1,874		)	4,271			1,625
Recorded income tax expense	$	196,913		$	205,770		$	180,517

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 carryforwards 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, 2017, we had no federal net operating loss carryforwards and approximately $1.1 billion of unused state net operating loss carryforwards available to be applied against future taxable income. The state net operating loss carryforwards will expire in varying amounts beginning in 2018 through 2037.

As of December 31, 2017, for federal tax purposes, we had capital loss carryforwards of $33.5 million. If not used, these carryforwards will fully expire in 2021. However, $30.5 million of the capital loss carryforwards will expire in 2018 if not used.

As of December 31, 2017, for federal tax purposes, we had foreign tax credit carryforwards of $5.7 million. The foreign tax credit carryforwards are available to offset federal taxes on future foreign source income. If not used, these carryforwards will 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,
	2017			2016
	(In thousands)
Deferred Tax Assets:
Book allowance for loan losses in excess of tax specific charge-offs	$	60,349		$	81,380
Interest on nonaccrual loans	8,519			7,485
Deferred compensation	6,174			3,148
Premises and equipment, principally due to differences in depreciation	3,789			7,395
Foreclosed assets valuation allowance	248			5,546
State tax benefit	3,781			7,187
Net operating losses	70,269			57,416
Capital loss carryforwards	14,264			17,740
Accrued liabilities	25,986			43,366
Unrealized loss from FDIC‑assisted acquisitions	4,654			7,207
Tax mark-to-market	9,207			11,793
Equity investments	7,549			15,195
Goodwill	15,641			29,996
Tax credits	5,651			16,493
Gross deferred tax assets	236,081			311,347
Valuation allowance	(94,120		)	(100,920		)
Deferred tax assets, net of valuation allowance	141,961			210,427
Deferred Tax Liabilities:
Core deposit and customer relationship intangibles	21,529			12,792
Deferred loan fees and costs	9,735			13,389
Unrealized gain on securities available‑for‑sale	15,107			4,118
FHLB stock	744			1,098
Subordinated debentures	24,518			37,499
Operating leases	65,286			41,785
Other	7,303			5,634
Gross deferred tax liabilities	144,222			116,315
Total net deferred tax asset (liability)	$	(2,261	)	$	94,112

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 receivable of $98.8 million at December 31, 2017 and net income taxes payable of $7.4 million at December 31, 2016.

As of December 31, 2017 and 2016, the Company had a valuation allowance of $94.1 million and $100.9 million against 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.

Notwithstanding the increase in the valuation allowance of $6.3 million as a result of the TCJA, the reduction in the valuation allowance during 2017 was $13.1 million. The reduction was due primarily to the release of an $11.6 million valuation allowance against foreign tax credits that the Company had previously determined was more likely than not to be expired unused. Combined with the result of the TCJA, the net change in the valuation allowance in 2017 was a net decrease of $6.8 million.

The TCJA, enacted on December 22, 2017, reduces the U.S. federal corporate tax rate from 35% to 21%, and, as a result, we re-measured our deferred federal tax assets and liabilities based on the rates at which they are expected to reverse in the future. The re-valuation of our deferred tax assets and liabilities is subject to further clarification of the TCJA and could result in refinements to our estimates. As a result, the actual impact to our deferred tax assets and liabilities and income tax expense due to the TCJA may vary from the amounts estimated.

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	2017			2016
	(In thousands)
Balance, beginning of year	$	9,985		$	15,155
Increase based on tax positions related to prior years	5,725			17,099
Reductions for tax positions related to prior years	(767		)	(1,901		)
Reductions related to settlements	(3,795		)	(19,833		)
Reductions for tax positions as a result of a lapse of the applicable statute of limitations	(939		)	(535		)
Balance, end of year	$	10,209		$	9,985

As of December 31, 2017 and 2016, our unrecognized tax benefits that, if recognized, would affect the effective tax rate were $2.2 million and $1.1 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 $1.5 million.

We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. For the year ended December 31, 2017, we recognized $0.2 million in expense for interest expense and penalties. 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. We had $0.5 million and $0.3 million accrued for the payment of interest and penalties as of December 31, 2017 and 2016.

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 2016. We are currently under examination by the IRS for tax years 2011 through 2012 and certain state jurisdictions for tax years 2009 through 2015.