Income Taxes

12 Months Ended

Dec. 31, 2019

Note 10. Income Taxes

Income tax expense attributable to continuing operations for each of the years ended December 31 is as follows (in thousands):


	2019		2018		2017
Current tax expense :
Federal	$	77,422	$	73,921	$	63,496
State	4,538		4,822		860
Total current tax expense	81,960		78,743		64,356
Deferred tax expense:
Federal	12,446		10,162		26,339
State	2,250		1,603		1,826
Deferred tax revaluation expense	—		—		31,486
Total deferred tax expense	14,696		11,765		59,651
Total income tax expense	$	96,656	$	90,508	$	124,007

Pinnacle Financial's income tax expense differs from the amounts computed by applying the Federal income tax statutory rates of 21% to income before income taxes for 2019 and 2018 and 35% for 2017. A reconciliation of the differences for each of the years in the three-year period ended December 31, 2019 is as follows (in thousands):


	2019		2018		2017
Income tax expense at statutory rate	$	104,483	$	94,489	$	104,295
State excise tax expense, net of federal tax effect	5,363		5,076		1,746
Tax-exempt securities	(11,078)		(7,222)		(5,666)
Federal tax credits	(1,704)		(845)		(434)
Bank owned life insurance	(3,646)		(2,764)		(2,778)
Insurance premiums	(238)		(112)		(283)
Revaluation of deferred tax assets and liabilities due to Tax Cuts and Jobs Act	—		—		31,486
Excess tax benefits associated with equity compensation	(1,011)		(2,966)		(5,366)

Other items	4,487		4,852		1,007
Income tax expense	$	96,656	$	90,508	$	124,007

Pinnacle Financial's effective tax rate for 2019 and 2018 differs from the Federal income tax rates primarily due to a state excise tax expense, investments in bank qualified municipal securities, tax benefits of Pinnacle Bank's real estate investment trust subsidiary, and tax benefits associated with share-based compensation, bank owned life insurance, and our captive insurance subsidiary, offset in part by the limitation on deductibility of meals and entertainment expense, and for 2019 and 2018, non-deductible executive compensation and FDIC premiums. Pinnacle Financial recognized a charge of $31.5 million in 2017 resulting from the revaluation of its deferred tax assets in accordance with the Tax Cuts and Jobs Act which reduced the corporate Federal tax rate from 35% to 21% effective January 1, 2018.

The components of deferred income taxes included in other assets in the accompanying consolidated balance sheets at December 31, 2019 and 2018 are as follows (in thousands):


	2019		2018
Deferred tax assets:
Loan loss allowance	$	23,051	$	20,449
Loans	20,808		29,453
Insurance	673		1,955
Accrued liability for supplemental retirement agreements	7,308		6,231
Restricted stock and stock options	10,515		9,026
Securities	—		15,974
Cash flow hedge	1,373		459
Equity method investment	425		602
Lease liability	22,782		2,099
Other real estate owned	691		1,158
Net federal operating loss carryforward and credits	5,954		13,754
Annual incentive compensation	12,626		9,996
Other deferred tax assets	1,810		3,343
Total deferred tax assets	108,016		114,499

Deferred tax liabilities:
Depreciation and amortization	12,455		11,769
Core deposit and other intangible assets	13,253		11,475
Securities	6,978		—
REIT dividends	1,650		1,589
FHLB related liabilities	925		925
Right-of-use assets and other leasing transactions	21,169		639
Subordinated debt	2,050		1,134
Partnership interests	3,534		459
Other deferred tax liabilities	1,875		1,758
Total deferred tax liabilities	63,889		29,748
Net deferred tax assets	$	44,127	$	84,751

At December 31, 2019, the Company had federal and state loss and tax credit carryforwards resulting from acquisitions of approximately $14.7 million that expire at various dates from 2028 to 2034.

ASC 740, Income Taxes, defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. This section also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties, and includes guidance concerning accounting for income tax uncertainties in interim periods.

A reconciliation of the beginning and ending unrecognized tax benefit related to state uncertain tax positions is as follows (in thousands):


	2019		2018		2017
Balance at January 1,	$	5,083	$	2,838	$	1,274
Increases due to tax positions taken during the current year	1,827		2,245		1,564
Increases due to tax positions taken during a prior year	—		—		—
Decreases due to the lapse of the statute of limitations during the current year	—		—		—
Decreases due to settlements with the taxing authorities during the current year	—		—		—
Balance at December 31,	$	6,910	$	5,083	$	2,838

Pinnacle Financial's policy is to recognize interest and/or penalties related to income tax matters in income tax expense. No interest and penalties were recorded for the year ended December 31, 2019.