INCOME TAXES

12 Months Ended

Dec. 31, 2019

NOTE 14 – INCOME TAXES

A reconciliation of the income tax expense for the years ended December 31, 2019, 2018 and 2017 to the “expected” tax expense, which was computed by applying the statutory federal income tax rate of 21 percent for 2019 and 2018 and 35 percent for 2017 to income before income tax expense, is as follows:


	2019		2018		2017
Computed “expected” tax expense	$	3,152	$	8,491	$	16,321
Increase (reduction) in tax expense resulting from:
State tax expense, net of federal tax effect	(1,924)		(612)		333
Effect of statutory rate changes enacted (1)	—		—		5,323
Non-deductible merger costs	—		67		19
Incentive stock options	439		475		506
Bank owned life insurance	(310)		(320)		(286)
Tax-exempt interest income, net of expense	(875)		(1,296)		(2,585)
Insurance premiums	(324)		(293)		(347)
Excess tax benefit from exercise of stock options and vesting of restricted stock	(201)		(647)		(805)
Other	230		47		52
Income tax expense	$	187	$	5,912	$	18,531

⁽¹⁾ On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), resulting in significant modifications to existing law. As a result of the changes under the Tax Act, the Company recorded incremental income tax expense of $5,323 during the year ended December 31, 2017, which consisted primarily of the remeasurement of deferred tax assets and liabilities at the new federal statutory rate of 21%. Prior to the enactment of the Tax Act, deferred tax assets and liabilities were measured at the previous federal statutory rate of 35%.

Income tax expense (benefit) was as follows:


	2019		2018		2017
Current expense
Federal	$	7,647	$	6,399	$	13,653
State	(503)		(684)		1,093
Deferred expense
Federal	(5,024)		288		(957)
State	(1,933)		(91)		(581)
Deferred tax revaluation expense	—		—		5,323
Income tax expense	$	187	$	5,912	$	18,531

The sources of deferred income tax assets (liabilities) at December 31, 2019 and 2018 and the tax effect is as follows:


	2019		2018
Deferred tax assets:
Organizational and start-up costs	$	38	$	51
Allowance for loan losses	11,679		5,881
Unrealized loss on securities	—		5,427
Net operating loss carry forward	1,753		2,035
Purchase accounting fair value adjustments	565		594
Accrued other expenses	1,284		701
Nonaccrual loan interest	110		105
Loan fees	1,050		656
Cash flow hedge	416		—
Lease liability	11,565		—
Other	1,652		1,421
Total deferred tax asset	30,112		16,871
Deferred tax liabilities:
Mortgage servicing rights	$	(841)	$	(879)
Premises and equipment	(1,620)		(1,204)
Prepaid expenses	(431)		(702)
Lease right-of-use asset	(11,085)		—
Unrealized gain on securities	(907)		—
Other	(999)		(897)
Total deferred tax liability	(15,883)		(3,682)
Net deferred tax asset	$	14,229	$	13,189

At December 31, 2019, the federal net operating loss remaining from the acquisition of MidSouth totaled $8,346, which will expire at various dates from 2029 to 2031. The federal net operating losses that can be utilized are subject to an annual limitation of $1,300. Deferred tax assets are recognized for net operating losses because the benefit is more likely than not to be realized.

The Company does not have any uncertain tax positions and did not have any interest and penalties recorded in the income statement for the years ended December 31, 2019, 2018 and 2017. The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of Tennessee. The Company is no longer subject to examination by taxing authorities for years before 2016.