Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Note 10.  Income Taxes

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

	2020		2019		2018
Current tax expense :
Federal	$	98,082	$	77,422	$	73,921
State	19,270		4,538		4,822
Total current tax expense	117,352		81,960		78,743
Deferred tax expense:
Federal	(45,450)		12,446		10,162
State	(12,865)		2,250		1,603
Total deferred tax (benefit) expense	(58,315)		14,696		11,765
Total income tax expense	$	59,037	$	96,656	$	90,508

Pinnacle Financial's income tax expense differs from the amounts computed by applying the Federal income tax statutory rate of 21% to income before income taxes. A reconciliation of the differences for each of the years in the three-year period ended December 31, 2020 is as follows (in thousands):

	2020		2019		2018
Income tax expense at statutory rate	$	77,985	$	104,483	$	94,489
State excise tax expense, net of federal tax effect	5,059		5,363		5,076
Tax-exempt securities	(13,706)		(11,078)		(7,222)
Federal tax credits	(3,717)		(1,704)		(845)
Bank owned life insurance	(4,759)		(3,646)		(2,764)
Insurance premiums	(272)		(238)		(112)
Excess tax benefits associated with equity compensation	(417)		(1,011)		(2,966)
Other items	(1,136)		4,487		4,852
Income tax expense	$	59,037	$	96,656	$	90,508

Pinnacle Financial's effective tax rate differs from the Federal income tax rates primarily due to a state excise tax expense, investments in bank-qualified municipal securities, tax benefits from Pinnacle Bank's real estate investment trust and municipal investment subsidiaries, and tax benefits associated with share-based compensation, bank owned life insurance, and Pinnacle Financial's captive insurance subsidiary, offset in part by the limitation on deductibility of meals and entertainment expense, non-deductible FDIC insurance premiums and non-deductible executive compensation.

The components of deferred income taxes included in other assets in the accompanying consolidated balance sheets at December 31, 2020 and 2019 are as follows (in thousands):

	2020		2019
Deferred tax assets:
Allowance for credit losses	$	72,316	$	23,051
Loans	14,694		20,808
Insurance	690		673
Accrued liability for supplemental retirement agreements	7,457		7,308
Restricted stock and stock options	9,181		10,515
Cash flow hedge	—		1,373
Equity method investment	171		425
Lease liability	23,894		22,782
Other real estate owned	2,287		691
Net federal operating loss carryforward and credits	1,796		5,954
Annual incentive compensation	8,712		12,626
Partnership interests	25,225		—
Allowance for off balance sheet credit exposures	6,069		618
Other deferred tax assets	2,559		2,501
Total deferred tax assets	175,051		109,325
Deferred tax liabilities:
Depreciation and amortization	14,418		12,455
Core deposit and other intangible assets	11,077		13,253
Securities	34,373		8,287
Cash flow hedge	19,627		—
REIT dividends	1,366		1,650
FHLB related liabilities	1,798		925
Right-of-use assets and other leasing transactions	22,232		21,169
Subordinated debt	1,920		2,050
Partnership interests	—		3,534
Other deferred tax liabilities	1,630		1,875
Total deferred tax liabilities	108,441		65,198
Net deferred tax assets	$	66,610	$	44,127

At December 31, 2020, the Company had federal and state loss and tax credit carryforwards resulting from acquisitions of approximately $8.4 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):

	2020		2019		2018
Balance at January 1,	$	6,910	$	5,083	$	2,838
Increases due to tax positions taken during the current year	2,748		1,827		2,245
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,	$	9,658	$	6,910	$	5,083

Pinnacle Financial's policy is to recognize interest and/or penalties related to income tax matters in income tax expense. Pinnacle Financial recognized $571,000 in interest and penalties for the year ended December 31, 2020.