PINNACLE FINANCIAL PARTNERS INC

Note 12. Income Taxes

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



	2017		2016		2015
Current tax expense :
Federal	$	63,496	$	49,769	$	41,721
State	860		—		48
Total current tax expense	64,356		49,769		41,769
Deferred tax expense:
Federal	26,339		12,776		4,963
State	1,826		1,614		857
Deferred tax revaluation expense	31,486		—		—
Total deferred tax expense	59,651		14,390		5,819
Total income tax expense	$	124,007	$	64,159	$	47,589

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



	2017			2016			2015
Income tax expense at statutory rate	$	104,295		$	66,984		$	50,084
State excise tax expense, net of federal tax effect	1,746			1,049			588
Tax-exempt securities	(5,666		)	(2,510		)	(2,543		)
Federal tax credits	(434		)	(282		)	—
Bank owned life insurance	(2,778		)	(1,242		)	(892		)
Insurance premiums	(283		)	(159		)	(306		)
Revaluation of deferred tax assets and liabilities due to Tax Cuts and Jobs Act	31,486			—			—
Excess tax benefits associated with equity compensation	(5,365		)	—			—
Change in uncertain tax positions	—			—			—
Other items	1,006			319			658
Income tax expense	$	124,007		$	64,159		$	47,589

Pinnacle Financial's effective tax rate for 2017 and 2016 differs from the statutory income tax rates primarily due to a state excise tax expense, investments in bank qualified municipal securities, our real estate investment trust, participation in the Community Investment Tax Credit (CITC) program, and bank owned life insurance, offset in part by the limitation on deductibility of meals and entertainment expense, certain merger-related expenses and the deferred tax asset revaluation in 2017 pursuant to the enactment of the Tax Cuts and Jobs Act. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. Among other items, the Tax Cuts and Jobs Act reduced the corporate statutory tax rate from 35% to 21%. As a result of such decrease, Pinnacle Financial recognized a charge of $31.5 million in 2017 resulting from the revaluation of its deferred tax assets.

The components of deferred income taxes included in other assets in the accompanying consolidated balance sheets at December 31, 2017 and 2016 are as follows (in thousands):



	2017		2016
Deferred tax assets:
Loan loss allowance	$	16,240	$	22,308
Loans	46,567		15,534
Insurance	614		869
Accrued liability for supplemental retirement agreements	7,413		5,587
Restricted stock and stock options	8,232		8,643
Securities	—		4,275
Cash flow hedge	499		1,520
Equity method investment	635		858
Leases	1,738		1,627
Other real estate owned	2,809		149
Net federal operating loss carryforward and credits	18,085		—
Other deferred tax assets	5,373		6,413
Total deferred tax assets	108,205		67,783

Deferred tax liabilities:
Depreciation and amortization	11,504		5,823
Core deposit intangible asset	14,073		5,621
Securities	616		—
REIT dividends	3,073		4,602
FHLB related liabilities	922		285
Subordinated debt	1,077		1,001
Other deferred tax liabilities	1,171		679
Total deferred tax liabilities	32,436		18,011
Net deferred tax assets	$	75,769	$	49,772

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. At December 31, 2017, the Company had federal and state loss and tax credit carryforwards of approximately $18.5 million that expire at various dates from 2027 to 2036.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Cuts and Jobs Act's enactment date for companies to complete the accounting under ASC 740, Income Taxes. The Company’s financial results reflect the income tax effects of the Tax Cuts and Jobs Act for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the Tax Cuts and Jobs Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined.

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



	2017		2016		2015
Balance at January 1,	$	1,274	$	134	$	391
Increases (decreases) due to tax positions taken during the current year	1,564		1,140		(257		)
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,	$	2,838	$	1,274	$	134

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, 2017.