NOTE 14. INCOME TAXES

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



	Year Ended December 31,
	2018			2017		2016
	(In thousands)
Current Income Tax Expense:
Federal	$	100,466		$	74,769	$	101,530
State	69,909			38,933		52,551
Total current income tax expense	170,375			113,702		154,081
Deferred Income Tax Expense:
Federal	4,746			63,463		55,857
State	(7,143		)	19,748		(4,168		)
Total deferred income tax expense	(2,397		)	83,211		51,689
Total income tax expense	$	167,978		$	196,913	$	205,770

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 rates of 21% for 2018 and 35% for 2017 and 2016 to earnings before income taxes:



	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Computed expected income tax expense at federal statutory rate	$	132,997		$	194,156		$	195,278
State tax expense, net of federal tax benefit	45,945			33,729			32,896
Tax‑exempt interest benefit	(9,810		)	(15,510		)	(13,992		)
Increase in cash surrender value of life insurance	(1,742		)	(1,853		)	(1,544		)
Low income housing tax credits, net of amortization	(2,025		)	(2,054		)	(1,439		)
Nondeductible employee compensation	2,552			1,781			1,257
Nondeductible acquisition‑related expense	71			1,608			—
Nondeductible FDIC premiums	1,664			—			—
Change in unrecognized tax benefits	(169		)	1,157			(2,268		)
Valuation allowance change	(15,721		)	(13,071		)	(8,689		)
Expired capital loss carryforward	8,097			—			—
Federal rate change	1,859			(1,156		)	—
Other, net	4,260			(1,874		)	4,271
Recorded income tax expense	$	167,978		$	196,913		$	205,770

The Company recognized $14.0 million and $8.4 million of tax credits and other tax benefits associated with its investments in LIHTC partnerships for the years ended December 31, 2018 and 2017. The amount of amortization of such investments reported in income tax expense under the proportional amortization method of accounting was $11.9 million for 2018 and $6.3 million for 2017.

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.

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, 2018, 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. A majority of the state net operating loss carryforwards will expire in varying amounts beginning in 2019 through 2038. A portion of the state net operating loss carryforwards generated after December 31, 2017 will carry forward indefinitely due to the state conformity to the federal net operating loss carryforward provisions as modified by the TCJA.

As of December 31, 2018, for federal tax purposes, we had capital loss carryforwards of $0.1 million. If not used, these carryforwards will fully expire in 2021.

As of December 31, 2018, for federal tax purposes, we had foreign tax credit carryforwards of $5.2 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,
	2018			2017
	(In thousands)
Deferred Tax Assets:
Book allowance for loan losses in excess of tax specific charge-offs	$	58,375		$	60,349
Interest on nonaccrual loans	4,389			8,519
Deferred compensation	6,015			6,174
Premises and equipment, principally due to differences in depreciation	4,506			3,789
Foreclosed assets valuation allowance	263			248
State tax benefit	6,570			3,781
Net operating losses	68,026			70,269
Capital loss carryforwards	4,212			14,264
Accrued liabilities	35,750			25,986
Unrealized loss from FDIC‑assisted acquisitions	3,559			4,654
Unrealized loss on securities available-for-sale	2,435			—
Tax mark-to-market	—			9,207
Equity investments	4,896			7,549
Goodwill	10,418			15,641
Tax credits	5,237			5,651
Other	4,887			—
Gross deferred tax assets	219,538			236,081
Valuation allowance	(78,407		)	(94,120		)
Deferred tax assets, net of valuation allowance	141,131			141,961
Deferred Tax Liabilities:
Core deposit and customer relationship intangibles	15,159			21,529
Deferred loan fees and costs	7,275			9,735
Unrealized gain on securities available‑for‑sale	—			15,107
FHLB stock	658			744
Tax mark-to-market	1,636			—
Subordinated debentures	23,164			24,518
Operating leases	75,750			65,286
Other	—			7,303
Gross deferred tax liabilities	123,642			144,222
Total net deferred tax asset (liability)	$	17,489		$	(2,261	)

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 deferred tax assets.

The Company had net income taxes receivable of $38.9 million and $98.8 million at December 31, 2018 and December 31, 2017.

As of December 31, 2018 and 2017, the Company had a valuation allowance of $78.4 million and $94.1 million against DTAs. Periodic reviews of the carrying amount of DTAs 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 the year ended December 31, 2018 was $15.7 million. Of this amount, $11.6 million consisted principally of adjustments to DTAs for tax attributes that expired in 2018. The DTAs 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 $11.6 million of deferred tax assets had no impact on the Company's effective tax rate for the year ended December 31, 2018. The remaining $4.1 million reduction in the valuation allowance was primarily due to an increase in the amount of foreign tax credit and capital loss carryforwards that were determined to be more likely than not to be utilized prior to expiration.

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	2018			2017
	(In thousands)
Balance, beginning of year	$	10,209		$	9,985
Increase based on tax positions related to prior years	1,278			5,725
Reductions for tax positions related to prior years	—			(767		)
Reductions related to settlements	(684		)	(3,795		)
Reductions for tax positions as a result of a lapse of the applicable statute of limitations	(1,231		)	(939		)
Balance, end of year	$	9,572		$	10,209

Unrecognized tax benefits that would have impacted the effective tax rate if recognized	$	5,806		$	6,443

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 $5.3 million.

We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. For the year ended December 31, 2018, we recognized $0.2 million in expense for interest expense and penalties. For the year ended December 31, 2017, we recognized $0.2 million in expense related to these items. 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. We had $0.8 million and $0.5 million accrued for the payment of interest and penalties as of December 31, 2018 and 2017.

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 2011 through 2017. We are currently under examination by the IRS for tax years 2011 through 2012 and certain state jurisdictions for tax years 2012 through 2016.