Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

The components of income tax expense were as follows:


	For the Years Ended December 31,
(amounts in thousands)	2019		2018		2017
Current
Federal	$	2,973	$	4,509	$	24,258
State	5,304		5,547		5,666
Total current expense	8,277		10,056		29,924

Deferred
Federal	13,175		9,702		14,885
State	1,341		(399)		233
Total deferred expense	14,516		9,303		15,118

Income tax expense	$	22,793	$	19,359	$	45,042

Effective tax rates differ from the federal statutory rate of 21% at December 31, 2019 and December 31, 2018, and 35% at December 31, 2017, which was applied to income before income tax expense, due to the following:


	For the Years Ended December 31,
	2019						2018						2017
(amounts in thousands)	Amount		% of pretax income		Amount		% of pretax income		Amount		% of pretax income
Federal income tax at statutory rate	$	21,445	21.00	%	$	19,121	21.00	%	$	43,357	35.00	%
State income tax, net of federal benefit	5,249		5.14		4,067		4.47		3,835		3.10
Tax-exempt interest, net of disallowance	(385)		(0.38)		(360)		(0.40)		(381)		(0.31)
Bank-owned life insurance	(1,677)		(1.64)		(1,547)		(1.70)		(2,675)		(2.16)
Tax credits	(1,266)		(1.24)		(444)		(0.49)		—		—
Equity-based compensation	132		0.13		(547)		(0.60)		(10,741)		(8.67)
Non-deductible executive compensation	440		0.43		230		0.25		654		0.53
Unrecorded basis difference in foreign subsidiaries	(144)		(0.14)		343		0.38		4,527		3.65
Enactment of federal tax reform	—		—		(21)		(0.02)		5,505		4.44
Other	(1,001)		(0.98)		(1,483)		(1.63)		961		0.78
Effective income tax rate	$	22,793	22.32	%	$	19,359	21.26	%	$	45,042	36.36	%

At December 31, 2019 and 2018, Customers had no ASC 740-10 unrecognized tax benefits. Customers does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. Customers recognizes interest and penalties on unrecognized tax benefits in other expense.

Deferred income taxes reflect temporary differences in the recognition of revenue and expenses for tax reporting and financial statement purposes, principally because certain items are recognized in different periods for financial reporting and tax return purposes. The following represents Customers' deferred tax asset and liabilities as December 31, 2019 and 2018:


	December 31,
(amounts in thousands)	2019		2018
Deferred tax assets
Allowance for loan and lease losses	$	14,616	$	10,449
Net unrealized losses on securities	—		7,639


Net operating losses	1,494		1,212


Compensation and benefits	5,839		6,234

Cash flow hedge	5,557		324


Section 197 intangibles	1,196		923
Deferred income	1,182		640
Lease liability	5,523		—
Other	1,307		2,766
Total gross deferred tax assets	36,714		30,187
Less: valuation allowance	(486)		—
Net deferred tax assets	36,228		30,187
Deferred tax liabilities
Fair value adjustments on acquisitions	(506)		(569)

Bank premises and equipment	(6,074)		(884)
Tax qualified lease adjustments	(30,496)		(17,786)
Right of use asset	(5,232)		—
Net unrealized gains on securities	(5,020)		—
Other	(640)		(746)
Total deferred tax liabilities	(47,968)		(19,985)
Net deferred tax asset/(liability)	$	(11,740)	$	10,202

The net deferred tax liability at December 31, 2019 is recorded in other liabilities and the net deferred tax asset at December 31, 2018 is recorded in other assets.

Customers had approximately $4.8 million of federal and state net operating loss carryovers subject to the annual limitation under Internal Revenue code Section 382 at December 31, 2019, that begin to expire in 2027. Customers also has state net operating loss carryovers for some states that begin to expire in 2037. Customers believes it is more likely than not the benefit of these state net operating loss carryovers generated by BankMobile Technologies, Inc. will not be realized. As such, there is a valuation allowance on the deferred tax assets of the jurisdictions in which the net operating losses relate.

Customers is subject to U.S. federal income tax as well as income tax in various state and local taxing jurisdictions. Generally, Customers is no longer subject to examination by federal, state, and local taxing authorities for years prior to the year ended December 31, 2016