Following is a summary of the major items comprising the differences in taxes from continuing operations computed at the federal statutory rate and as recorded in the consolidated statements of income:

	Three Months Ended
	March 31,
(dollars in thousands)		2019				2018
Provision at statutory rate of 21%	$	14,570			$	11,117
Tax-exempt income:
Tax-exempt interest		(2,531	)			(2,191	)
Section 291/265 interest disallowance		111				62
Company-owned life insurance income		(669	)			(547	)
Tax-exempt income		(3,089	)			(2,676	)
State income taxes		1,999				1,188
Interim period effective rate adjustment		688				92
Tax credit investments - federal		(420	)			(5,769	)
Other, net		(644	)			1,005
Income tax expense	$	13,104			$	4,957
Effective tax rate		18.9		%		9.4		%

In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at March 31, 2019 and 2018 based on the current estimate of the effective annual rate.

The higher effective tax rate during the three months ended March 30, 2019 when compared to the three months ended March 31, 2018 is primarily the result of a decrease in federal tax credits available.

Old National has an immaterial amount of unrecognized tax benefits. Old National expects the total amount of unrecognized tax benefits to be reduced to zero in the third quarter of 2019.

Significant components of net deferred tax assets (liabilities) were as follows at March 31, 2019 and December 31, 2018:

	March 31,			December 31,
(dollars in thousands)	2019			2018
Deferred Tax Assets
Allowance for loan losses, net of recapture	$	14,458		$	14,514
Benefit plan accruals		14,624			21,754
Alternative minimum tax credit		2,545			2,545
Net operating loss carryforwards		30,168			31,765
Federal tax credits		3,116			1,779
Deferred gain on securities		1,844			1,976
Acquired loans		24,857			26,956
Operating lease liabilities		30,451			—
Lease exit obligation		—			1,025
Unrealized losses on available-for-sale investment securities		—			11,853
Unrealized losses on held-to-maturity investment securities		2,391			2,497
Tax credit investments and other partnerships		3,196			3,004
Other real estate owned		144			144
Other, net		2,691			3,167
Total deferred tax assets		130,485			122,979
Deferred Tax Liabilities
Accretion on investment securities		(795	)		(595	)
Purchase accounting		(17,873	)		(18,100	)
Loan servicing rights		(6,080	)		(6,141	)
Premises and equipment		(11,019	)		(8,507	)
Prepaid expenses		(716	)		(681	)
Operating lease right-of-use assets		(29,393	)		—
Unrealized gains on available-for-sale investment securities		(2,725	)		—
Unrealized gains on hedges		(167	)		(358	)
Other, net		(2,287	)		(1,549	)
Total deferred tax liabilities		(71,055	)		(35,931	)
Net deferred tax assets	$	59,430		$	87,048

Through the acquisition of Anchor (WI) in the second quarter of 2016 and Lafayette Savings Bank in the fourth quarter of 2014, both former thrifts, Old National Bank’s retained earnings at March 31, 2019 include base-year bad debt reserves, created for tax purposes prior to 1988, totaling $52.8 million. Of this total, $50.9 million was acquired from Anchor (WI), and $1.9 million was acquired from Lafayette Savings Bank. Base-year reserves are subject to recapture in the unlikely event that Old National Bank (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes, (2) redeems its stock, or (3) liquidates. Old National Bank has no intention of making such a nondividend distribution. Accordingly, under current accounting principles, a related deferred income tax liability of $13.0 million has not been recognized.

No valuation allowance was recorded at March 31, 2019 or December 31, 2018 because, based on current expectations, Old National believes it will generate sufficient income in future years to realize deferred tax assets. Old National has federal net operating loss carryforwards totaling $97.1 million at March 31, 2019 and $104.5 million at December 31, 2018. This federal net operating loss was acquired from the acquisition of Anchor (WI) in 2016. If not used, the federal net operating loss carryforwards will expire from 2028 to 2033. Old National has alternative minimum tax (“AMT”) credit carryforwards totaling $6.3 million at March 31, 2019 and $10.1 million at December 31, 2018. The enactment of H.R. 1 eliminates the parallel tax system known as the AMT and allows any existing AMT credits to be used to reduce regular tax or be refunded from 2018 to 2021. ASC 740 allows for the reclassification of the AMT credit from a deferred tax asset to a current tax asset, except for the amount limited by section 382. Old National has $2.5 million of AMT credit carryforward subject to section 382 limitations. The $2.5 million is maintained in deferred tax assets and the remaining $3.8 million has been reclassified to a current tax asset. Old National has federal tax credit carryforwards of $3.1 million at March 31, 2019 and $1.8 million at December 31, 2018. The federal tax credits consist mainly of energy efficient home credits, low income housing

credits, and research and development credits that, if not used, will expire from 2025 to 2039. Old National has recorded state net operating loss carryforwards totaling $165.0 million at March 31, 2019 and $165.6 million at December 31, 2018. If not used, the state net operating loss carryforwards will expire from 2024 to 2033.

The federal and recorded state net operating loss carryforwards are subject to an annual limitation under Internal Revenue Code section 382. Old National believes that all of the recorded net operating loss carryforwards will be used prior to expiration.