Note L—Income Taxes

The Company operates predominantly in the United States and is subject to corporate net income taxes for federal and state purposes. The Company sold its minimal operations in Europe in April 2017. These taxes were not considered material to the overall financial statements. Tax expense is computed in total on combined continuing and discontinued operations, then separately for continuing operations which is subtracted from that total. The remainder is shown as tax expense for discontinued operations. The components of income tax expense included in the statements of continuing operations are as follows:


	For the years ended
	December 31,
	2019	2018	2017
	(in thousands)
Current tax provision
Federal	$ 14,407	$ 11,038	$ 1,044
State	5,212	5,379	1,213
	19,619	16,417	2,257
Deferred tax provision (benefit)
Federal	1,382	13,926	22,599
State	225	1,898	(1,800)
	1,607	15,824	20,799
	$ 21,226	$ 32,241	$ 23,056

The differences between applicable income tax expense (benefit) from continuing operations and the amounts computed by applying the statutory federal income tax rate of 21% for 2019 and 2018 and 34% for 2017, are as follows:


	For the years ended
	December 31,
	2019	2018	2017
	(in thousands)

Computed tax expense at statutory rate	$ 15,224	$ 25,154	$ 13,734
Tax effect of federal rate change	-	-	17,293
State taxes	4,140	6,148	1,199
Tax-exempt interest income	(467)	(408)	(1,600)
Meals and entertainment	97	80	63
Civil money penalty	1,870	-	-
Other nondeductible items	263	546	2,421
Valuation allowance - domestic	-	721	(9,813)
Other	99	-	(241)
	$ 21,226	$ 32,241	$ 23,056

Deferred income taxes are provided for the temporary difference between the financial reporting basis and the tax basis of the Company’s assets and liabilities. Cumulative temporary differences recognized in the financial statement of position are as follows:


	For the years ended
	December 31,
	2019	2018
	(in thousands)
Deferred tax assets:
Allowance for loan and lease losses	$ 2,150	$ 1,817
Non-accrual interest	867	1,993
Deferred compensation	692	680
State taxes	1,333	1,558
Nonqualified stock options	1,806	1,440
Capital loss limitations	3,579	3,579
Tax deductible goodwill	3,064	3,462
Partnership interest, Walnut St basis difference	12,420	10,412
Fair value adjustment to investments	808	753
Loan charges	3,434	4,352
Unrealized loss on AFS securities	-	5,240
Other	1,326	1,260
Total gross deferred tax assets	31,479	36,546
Federal and state valuation allowance	(14,869)	(12,952)

Deferred tax liabilities:
Unrealized gains on investment securities available for sale	2,237	-
Discount on Class A notes	92	92
Depreciation	1,743	1,880
Total deferred tax liabilities	4,072	1,972
Net deferred tax asset	$ 12,538	$ 21,622

Management assesses all available positive and negative evidence to determine whether it is more likely than not that the Company will be able to recognize the existing deferred tax assets. The majority of valuation allowances reversed in 2017 with the remaining valuation allowance reflecting capital losses in Walnut Street. The remaining valuation allowance will likely reverse only to the extent that recoveries exceed any potential future losses in Walnut Street. The federal and state valuation allowance at December 31, 2019 and 2018, respectively, was $14.9 million and $12.9 million.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


	For the years ended
	December 31,
	2019	2018	2017
	(in thousands)
Beginning balance at January 1	$ 338	$ 338	$ 339
Decreases in tax provisions for prior years	-	-	(1)
Gross unrecognized tax benefits at December 31	$ 338	$ 338	$ 338

Management does not believe these amounts will significantly increase or decrease within 12 months of December 31, 2019. The total amount of unrecognized tax benefits, if recognized, will impact the effective tax rate.

Tax years after 2016 remain subject to examination by the federal authorities and 2015 and after remain subject to examination by most of the state tax authorities. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense for all periods presented. To date, no amounts of interest or penalties relating to unrecognized tax benefits have been recorded.