Income Taxes

The current and deferred components of the provision for income taxes were as follows:



	Years Ended December 31,
(Dollars in thousands)	2016			2015		2014
Current income tax expense (benefit)
Federal	$	19,144		$	31,300	$	29,200
State	(423		)	—		—
Total current income tax expense	18,721			31,300		29,200
Deferred expense (benefit)
Federal	23,649			5,700		(1,700		)
State	442			—		—
Total deferred income tax expense (benefit)	24,091			5,700		(1,700		)
Change in valuation allowance	(706		)	—		—
Income tax provision	$	42,106		$	37,000	$	27,500

A reconciliation of expected income tax expense at the federal statutory income tax rate and the amounts recorded in the Consolidated Financial Statements were as follows:



	Years Ended December 31,
	2016					2015					2014
(Dollars in thousands)	Amount			Rate		Amount			Rate		Amount			Rate
Tax at statutory rate	$	52,548		35.0	%	$	43,341		35.0	%	$	31,367		35.0	%
Changes resulting from:
Tax-exempt interest income	(5,320		)	(3.5	)	(3,943		)	(3.2	)	(3,142		)	(3.5	)
State taxes, net of federal benefit	13			—		—			—		—			—
Change in valuation allowance	(706		)	(0.5	)	—			—		—			—
Bank-owned life insurance adjustments	(832		)	(0.6	)	(124		)	(0.1	)	(95		)	(0.1	)
Director plan change in control	(508		)	(0.3	)	—			—		—			—
Income tax credits, net	(2,454		)	(1.6	)	(2,557		)	(2.1	)	(1,624		)	(1.8	)
Nondeductible transaction expenses	2,100			1.4		411			0.3		403			0.4
Tax benefits in excess of compensation costs on share-based payments⁽¹⁾	(2,240		)	(1.5	)	—			—		—			—
Other, net	(495		)	(0.4	)	(128		)	—		591			0.7
Income tax expense	$	42,106		28.0	%	$	37,000		29.9	%	$	27,500		30.7	%

⁽¹⁾The year ended December 31, 2016 reflects the impact of the early adoption of ASU 2016-09 which resulted in excess tax benefits recognized within "Income tax expense" rather than previously recognized directly into equity with "Additional paid-in-capital." Refer to Note 1, Summary of Significant Accounting Policies, for further details.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the deferred tax assets and liabilities at December 31, 2016 and 2015 were as follows:



	December 31,
(Dollars in thousands)	2016			2015
Deferred tax assets:
Allowance for loan losses	$	45,763		$	24,863
Acquisition-related fair value adjustments	62,078			29,280
Accrued stock-based compensation	18,891			3,240
Loss and tax credit carry forwards	47,977			7,235
Acquisition built in loss carry forward	28,469			—
Depreciation	3,896			4,333
Nonaccrual loan interest	9,465			4,994
Accrued expense	20,858			13,296
Other	7,401			5,951
Total deferred tax assets	244,798			93,192
Deferred tax liabilities:
Loan servicing rights	20,450			3,893
Core deposit intangible assets	11,844			7,379
Goodwill	6,373			5,808
Other	(715		)	4,742
Total deferred tax liabilities	37,952			21,822
Net deferred tax asset before valuation allowance	206,846			71,370
Valuation allowance	(2,239		)	(1,180		)
Net deferred tax asset	$	204,607		$	70,190

On August 31, 2016, the Corporation merged with Talmer and recorded $151.9 million in deferred tax assets, net of valuation allowance. In connection with the merger, Talmer incurred an ownership change within the meaning of Section 382 of the Internal Revenue Code (IRC). At August 31, 2016, Talmer had $102.8 million in gross federal net operating loss carry forwards, $88.7 million in gross realized built-in loss carry forwards, $1.0 million in federal tax credit carry forwards that expire from 2026 through 2035, and $14.9 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 December 31, 2016 totaled $2.2 million and included $1.4 million due to IRC Section 382 limitations on the utilization of pre-ownership change loss and tax credit 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.

Due to the substantial equity value of Talmer at the time of the ownership change, the entity was deemed to be in a net unrealized built-in gain position which allows for the utilization of certain carry forward attributes. Therefore, no additional valuation allowance was established against Talmer's net deferred tax assets.

The following table is a summary of the loss attributes, Section 382 limitations, and tax expiration periods as of December 31, 2016.



	From the Acquisition of:
						Talmer's Prior Ownership Changes
(Dollars in thousands)	Talmer		Monarch			First Place Holdings/First Place Bank			Talmer West Bank			First of Huron Corp./Signature Bank		From 2009 Ownership change			Not Limited by Section 382		Total
Tax Loss and Credit Carryforwards as of 12/31/16:
Years Expiring (except AMT Credits)	2032-2034		2026-2034			2026-2031			2030-2035			2031-2033		2027-2029			2033-2035
Annual Section 382 limitation-base⁽¹⁾	$	34,668	$	673		$	6,650		$	3,028		$	365	$	145		$	—	N/A
Gross Federal Net Operating Losses	17,723		17,744			1,222			50,086			1,014		1,885			—		89,674
Gross Capital Losses	797		—			—			—			—		—			—		797
Realized Built-in Losses	—		—			71,805			8,936			—		—			—		80,741
Business Tax Credits	170		1,651			781			—			—		—			592		3,194
Less amounts not recorded due to Sec 382 Limitation	—		(1,738		)	—			(2,992		)	—		(145		)	—		(4,875	)
Alternative Minimum Tax Credits - no expiration	12,473		106			2,115			—			303		—			730		15,727
Valuation Allowance	—		—			(66		)	(1,287		)	—		—			—		(1,353	)

⁽¹⁾In respect to the Monarch and Talmer acquisitions, in addition to the statutory "base" Section 382 limitation, recognized built in gain increases the Section 382 limitation during the five year period beginning on the acquisition date. The Corporation estimates that the recognized built in gain will total $5.6 million and $322.3 million for the Monarch and Talmer acquisitions, respectively.

Management concluded that no valuation allowance was necessary on the remainder of the Corporation's net deferred tax assets at December 31, 2016 and 2015. This determination was based on the Corporation's history of pre-tax and 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.

At December 31, 2016, the Corporation had approximately $36.0 million of bad debt reserve in equity for which no provision for federal income taxes was recorded. This amount represents Talmer's qualifying thrift bad debt reserve at December 31, 1987 through its acquisition of First Place Bank, which is only required to be recaptured into taxable income if certain events occur. At December 31, 2016, the potential tax on the above amount was approximately $13.0 million. The Corporation does not intend to take any action that would result in a recapture of any portion of its bad debt reserve.

The Corporation's federal tax return for the years ended December 31, 2013 to present are open to potential examination. Talmer amended its four federal tax returns for the years 2011, 2012, 2013 and 2014 to reflect the impact of changes to First Place Bank due to an IRS settlement in January of 2016. These four amendments were selected for audit and are currently in the process of being finalized. The Corporation does not anticipate any changes as a result of the audit. The Corporation's most significant states of operation, Michigan and Ohio, do not impose income-based taxes on financial institutions. The Corporation and/or its subsidiaries are subject to immaterial amounts of income tax in various other states, with varying years open to potential examination. The Corporation is not aware of any pending income tax examinations by any state jurisdiction.

The Corporation had no unrecognized tax benefits at December 31, 2016 or 2015 and does not expect to record unrecognized tax benefits of any significance during the next twelve months. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense, when applicable. There are no liabilities accrued for interest or penalties at December 31, 2016 or 2015.