Income Taxes

The current and deferred components of the provision for income taxes were as follows:



	Years Ended December 31,
(Dollars in thousands)	2018			2017			2016
Current income tax expense (benefit)
Federal	$	(653	)	$	14,665		$	19,144
State	321			20			(423		)
Total current income tax expense	(332		)	14,685			18,721
Deferred income tax expense
Federal	41,687			92,636			23,649
State	229			548			442
Total deferred income tax expense	41,916			93,184			24,091
Change in valuation allowance	317			(1,089		)	(706		)
Income tax provision	$	41,901		$	106,780		$	42,106

A reconciliation of expected income tax expense at the federal statutory income tax rate and the amounts recorded in the Consolidated Financial Statements were as follows:



	Years Ended December 31,
	2018					2017					2016
(Dollars in thousands)	Amount			Rate		Amount			Rate		Amount			Rate
Tax at statutory rate	$	68,443		21.0	%	$	89,706		35.0	%	$	52,548		35.0	%
Changes resulting from:
Tax-exempt interest income	(6,513		)	(2.0	)	(9,001		)	(3.5	)	(5,320		)	(3.5	)
State taxes, net of federal benefit	434			0.1		369			0.1		13			—
Change in valuation allowance	317			0.1		(1,089		)	(0.4	)	(706		)	(0.5	)
Bank-owned life insurance adjustments	(838		)	(0.2	)	(1,696		)	(0.7	)	(832		)	(0.6	)
Director plan change in control	—			—		—			—		(508		)	(0.3	)
Income tax credits, net	(16,148		)	(4.9	)	(11,449		)	(4.4	)	(2,454		)	(1.6	)
Nondeductible transaction expenses				—		156			0.1		2,100			1.4
Nondeductible FDIC insurance premiums	1,095			0.3		—			—		—			—
Tax benefit in excess of compensation costs on share-based payments⁽¹⁾	(1,782		)	(0.5	)	(5,886		)	(2.3	)	(2,240		)	(1.5	)
Impact of the Tax Cuts and Jobs Act⁽²⁾	(2,939		)	(0.9	)	46,660			18.2		—			—
Other, net	(168		)	(0.1	)	(990		)	(0.4	)	(495		)	(0.4	)
Income tax expense	$	41,901		12.9	%	$	106,780		41.7	%	$	42,106		28.0	%


⁽¹⁾	Represents excess tax benefits resulting from the exercise or settlement of share-based payment transactions.

⁽²⁾

The year ended December 31, 2017 included the initial calculated impact of the enactment of H.R.1 (the "Tax Cuts and Jobs Act"), which required a revaluation of net deferred tax assets and liabilities. The year ended December 31, 2018 included the impact of analyzing additional information in the year following the enactment date of the Tax Cuts and Jobs Act that was not previously available, as allowed by Staff Accounting Bulletin (SAB) No. 118, issued in late December 2017. See below for further details.

On December 22, 2017, H.R.1 (known as the "Tax Cuts and Jobs Act") was signed into law. Among other provisions, the Tax Cuts and Jobs Act, reduced the statutory corporate income tax rate from a maximum rate of 35% to a flat tax rate of 21%, effective January 1, 2018. ASC Topic 740 requires the recognition of the effects of tax law changes be recorded in the period in which the law is enacted. Therefore, the Corporation's deferred tax assets and liabilities which were previously valued at a federal rate of 35%, were revalued to the current enacted federal tax rate of 21% as of December 31, 2017. In addition, the SEC issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act, thereby allowing a measurement period to reflect provisional adjustments as information becomes available. The measurement period includes the Tax Cuts and Jobs Acts' enactment date up until one year after.

During the year ended December 31, 2017, the impact of the Tax Cuts and Jobs Act resulted in a $46.7 million increase to income tax expense related to continuing operations as a result of the revaluation of the net deferred tax asset of $46.0 million and an acceleration of amortization expense on the low income housing tax credit investment portfolio of $0.7 million. The Corporation did not have any provisional adjustments to its net deferred tax asset as a result of the tax reform at December 31, 2017 under Staff Accounting Bulletin No. 118, but continued to obtain, prepare and analyze information as it became available during 2018 in order to complete the accounting requirements under ASC Topic 740 by utilizing the measurement period afforded under SAB 118. These adjustments were finalized with the filing of the Company's 2017 Federal tax return in the fourth quarter and resulted in a tax benefit of $2.9 million.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the deferred tax assets and liabilities at December 31, 2018 and 2017 were as follows:



	December 31,
(Dollars in thousands)	2018			2017
Deferred tax assets:
Allowance for loan losses	$	24,019		$	20,446
Acquisition-related fair value adjustments	16,511			27,607
Unrealized loss on securities	10,040			2,751
Accrued stock-based compensation	3,239			4,082
Loss and tax credit carry forwards	30,169			57,969
Nonaccrual loan interest	10,830			6,155
Accrued expense	7,397			9,200
Other	4,888			9,330
Total deferred tax assets	107,093			137,540
Deferred tax liabilities:
Loan servicing rights	14,941			13,446
Core deposit intangible assets	4,966			6,022
Goodwill	4,281			4,076
Deferred loan fees	4,963			4,551
Prepaid expenses	5,625			7,390
Other	5,894			3,184
Total deferred tax liabilities	40,670			38,669
Net deferred tax asset before valuation allowance	66,423			98,871
Valuation allowance	(1,467		)	(1,150		)
Net deferred tax asset	$	64,956		$	97,721

The valuation allowance against the Corporation’s deferred tax assets at December 31, 2018 and 2017 totaled $1.5 million and $1.2 million respectively. The valuation allowance at December 31, 2018 included management’s estimate of capital loss carry forwards more likely than not to expire unutilized. Included in the valuation allowance at December 31, 2017 was $0.6 million due to IRC Section 382 limitations on the utilization of pre-ownership change loss and tax credit carry forwards associated with previously acquired entities and $0.6 million due to management’s estimate of capital loss carry forwards more likely than not to expire unutilized. Actual outcomes could vary from the Corporation's current estimates, resulting in future increases or decreases in the valuation allowance and corresponding future tax expense or benefit.

Management concluded that no valuation allowance was necessary on the remainder of the Corporation's net deferred tax assets at December 31, 2018 and 2017. This determination was based on the Corporation's history of pre-tax and taxable income over the prior three years, as well as management's expectations for sustainable profitability in the future. Management monitors deferred tax assets quarterly for changes affecting the ability to realize and the valuation allowance could be adjusted in future periods.

The following table is a summary of the loss attributes, Section 382 limitations, and tax expiration periods as of December 31, 2018.



	From the Acquisition of:
				Talmer Bancorp and Talmer Bank Prior Ownership Changes
(Dollars in thousands)	Monarch			First Place Holdings/First Place Bank			Talmer West Bank		First of Huron Corp./Signature Bank		From 2009 Ownership change			Not Limited by Section 382			Total
Tax Loss and Credit Carryforwards as of 12/31/18:
Years Expiring (except AMT Credits)	2026-2034			2027-2031			2028-2032		2029-2032		2027-2029
Annual Section 382 limitation-base⁽¹⁾	$	673		$	6,650		$	3,028	$	365	$	145		$	—		$ N/A
Gross Federal Net Operating Losses	12,350			—			41,039		247		1,595			—			55,231
Gross Capital Losses	—			—			—		—		—			6,987			6,987
Realized Built-in Losses	—			61,317			8,936		—		—			—			70,253
Business Tax Credits	1,651			781			—		—		—			—			2,432
Less amounts not recorded due to Sec 382 Limitation	(1,738		)	(140		)	—		—		(145		)	—			(2,023	)
Alternative Minimum Tax Credits - no expiration	106			2,115			—		303		—			—			2,524
Valuation Allowance	—			—			—		—		—			(1,467		)	(1,467	)


⁽¹⁾	In respect to the Monarch acquisition, in addition to the statutory "base" Section 382 limitation, recognized built in gain increases the Section 382 limitation during the five year period beginning on the acquisition date. The Corporation estimates that the recognized built in gain will total $1.6 million.

At December 31, 2018, the Corporation had approximately $36.0 million of bad debt reserve in equity for which no provision for federal income taxes was recorded. This amount represents Talmer's qualifying thrift bad debt reserve at December 31, 1987 through its acquisition of First Place Bank, which is only required to be recaptured into taxable income if certain events occur. At December 31, 2018, the potential tax on the above amount was approximately $7.5 million. The Corporation concluded its audit for Talmer Bancorp's Financial Institutions tax for the years ended December 31, 2013, 2014 and 2015, with no changes.

The Corporation's federal tax returns for the years ended December 31, 2015 to present are open to potential examination. Talmer amended its four federal tax returns for the years 2011, 2012, 2013 and 2014 to reflect the impact of changes to First Place Bank due to an IRS settlement in January of 2016. These four amendments were selected for audit which concluded with no changes and all expected refunds were received in 2017.The Corporation's most significant states of operation, Michigan and Ohio, do not impose income-based taxes on financial institutions. The Corporation and/or its subsidiaries are subject to immaterial amounts of income tax in various other states, with varying years open to potential examination. The Corporation concluded its audit for Talmer Bancorp's Ohio Financial Institutions tax for the years ended December 31, 2013, 2014, and 2015, with no changes.

The Corporation had no unrecognized tax benefits at December 31, 2018 or 2017 and does not expect to record unrecognized tax benefits of any significance during the next twelve months. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense, when applicable. There were no liabilities accrued for interest and/or penalties at December 31, 2018 or 2017.