Income Taxes

The Corporation records its federal income tax expense using its estimate of the effective income tax rate expected for the full year and applies that rate on a year-to-date basis. The fluctuations in the Corporation's effective federal income tax rate reflect changes each period in the proportion of interest income exempt from federal taxation, nondeductible transaction costs and other nondeductible expenses relative to pretax income and tax credits.

The differences between the provision for federal income taxes computed at the federal statutory income tax rate and the amounts recorded in the consolidated financial statements were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2016			2015			2016			2015
Tax at statutory rate	$	5,016		$	11,923		$	29,400		$	30,844
Changes resulting from:
Tax-exempt interest income	(1,321		)	(1,033		)	(3,599		)	(2,809		)
State taxes, net of federal benefit	(803		)	—			(803		)	—
Change in valuation allowance	(29		)	—			(29		)	—
Bank-owned life insurance adjustments	(169		)	—			(524		)	—
Director plan change in control	(525		)	—			(525		)	—
Income tax credits, net	(413		)	(992		)	(2,428		)	(1,851		)
Nondeductible transaction expenses	2,100			—			2,100			525
Other, net	(256		)	(298		)	708			91
Provision for federal income taxes	$	3,600		$	9,600		$	24,300		$	26,800
Effective federal income tax rate	25.1		%	28.2		%	28.9		%	30.4		%

The significant components of the deferred tax assets and liabilities at September 30, 2016 and December 31, 2015 were as follows:



(Dollars in thousands)	September 30, 2016			December 31, 2015
Deferred tax assets:
Allowance for loan losses	$	44,233		$	24,863
Acquisition-related fair value adjustments	65,596			29,280
Accrued stock-based compensation	18,353			3,240
Loss and tax credit carry forwards	55,921			6,850
Acquisition built in loss carry forwards	31,316			—
Depreciation	3,900			4,333
Nonaccrual interest	8,064			4,994
Accrued expense	18,400			13,296
Other	17,861			5,951
Total deferred tax assets	263,644			92,807
Deferred tax liabilities:
Loan servicing rights	18,021			3,893
Core deposit intangible assets	9,938			7,379
Goodwill	6,350			5,808
Other	7,829			4,742
Total deferred tax liabilities	42,138			21,822
Net deferred tax asset before valuation allowance	221,506			70,985
Valuation allowance	(2,502		)	(795		)
Net deferred tax asset	$	219,004		$	70,190

On August 31, 2016, the Corporation merged with Talmer and recorded $155.9 million in net deferred tax assets. Upon merging, Talmer incurred an ownership change within the meaning of Section 382 of the Internal Revenue Code (IRC), limiting the Corporation’s ability to benefit from the use of Talmer’s pre-ownership change loss and tax credit carry forwards. At August 31, 2016, Talmer had $91.8 million in gross federal net operating loss carry forwards, $88.7 million in gross realized built-in loss carry forwards, $1.0 million in tax credit carry forwards that expire from 2026 through 2035, and $16.7 million in federal alternative minimum tax credits with an indefinite life.

Talmer’s acquisitions prior to its merger with the Corporation on August 31, 2016 resulted in ownership changes within the meaning of IRC Section 382. As such, the Corporation’s ability to benefit from the use of Talmer’s previously acquired entities’ pre-ownership change net operating loss and tax credit carry forwards, as well as the deductibility of certain built-in losses if realized during a five-year recognition period (one year with respect to bad debt deductions), is limited, putting at risk the utilization of associated deferred tax assets before they expire. At August 31, 2016, a valuation allowance of $1.8 million was established against the deferred tax assets associated with Talmer’s previously acquired entities’ pre-change net operating losses and tax credit carry forwards, realized built-in loss carry forwards and management's estimate of the amount and timing of built-in losses more likely than not to be realized over the remaining Section 382 recognition periods.

The valuation allowance against the Corporation’s deferred tax assets at September 30, 2016 totaled $2.5 million and included $1.7 million due to IRC Section 382 limitations on the utilization of pre-ownership change loss and tax credits carry forwards associated with Talmer’s previously acquired entities and $0.8 million due to management’s estimate of capital loss carry forwards more likely than not to expire unutilized. Actual outcomes could vary from the Corporation's current estimates, resulting in future increases or decreases in the valuation allowance and corresponding future tax expense or benefit.

Management concluded that no valuation allowance was necessary on the remainder of the Corporation's net deferred tax assets at September 30, 2016 and December 31, 2015. This determination was based on the Corporation's history of pre-tax and financial taxable income over the prior three years, as well as management's expectations for sustainable profitability in the future. Management monitors deferred tax assets quarterly for changes affecting realizability and the valuation allowance could be adjusted in future periods.