Income Taxes

12 Months Ended

Dec. 31, 2019

The provision for income taxes is as follows:



	For the Year Ended December 31,
(In thousands)	2019		2018		2017
Current
Federal	$	20,954	$	9,078	$	667
State	1,932		—		2

Deferred
Federal	2,808		7,018		32,791
State	4,179		4,163		2,876
	$	29,873	$	20,259	$	36,336

The difference between the total expected tax expense (computed by applying the U.S. Federal tax rate of 21% to pretax income in 2019 and 2018 and 35% in 2017) and the reported income tax provision relating to income before income taxes is as follows:



	For the Year Ended December 31,
(In thousands)	2019			2018			2017
Tax rate applied to income before income taxes	$	27,008		$	18,381		$	27,720
Increase (decrease) resulting from the effects of:
Tax law change	—			—			8,552
Nondeductible acquisition costs	125			207			657
Tax exempt interest on loans, obligations of states and political subdivisions and bank owned life insurance	(1,282		)	(667		)	(1,445		)
State income taxes	(1,283		)	(874		)	(1,007		)
Tax credit investments	(72		)	(33		)	(165		)
Stock compensation	(698		)	(918		)	(1,027		)
Other	(36		)	—			173
Federal tax provision	23,762			16,096			33,458
State tax provision	6,111			4,163			2,878
Total income tax provision	$	29,873		$	20,259		$	36,336

The net deferred tax assets (liabilities) are comprised of the following as of:



	December 31,
(In thousands)	2019			2018
Allowance for loan losses	$	8,949		$	8,592
Premises and equipment	—			1,670
Other real estate owned	8			207
Accrued stock compensation	2,406			2,547
Federal tax loss carryforward	3,601			4,699
State tax loss carryforward	1,110			2,912
Alternative minimum tax credit carryforward	530			—
Lease liabilities	7,381			—
Net unrealized securities losses	—			4,658
Deferred compensation	2,458			2,287
Accrued interest and fee income	3,106			7,674
Other	378			1,627
Gross deferred tax assets	29,927			36,873
Less: Valuation allowance	—			—
Deferred tax assets net of valuation allowance	29,927			36,873

Core deposit base intangible	(4,005		)	(5,706		)
Net unrealized securities gains	(1,210		)	—
Premises and equipment	(114		)	—
Right of use assets	(6,416		)	—
Other	(1,725		)	(2,213		)
Gross deferred tax liabilities	(13,470		)	(7,919		)
Net deferred tax assets	$	16,457		$	28,954

Included in the table above is the effect of temporary differences associated with the Company's investments in debt securities accounted for under ASC Topic 320, for which no deferred tax expense or benefit was recognized. These items are recorded as Accumulated Other Comprehensive Income in the shareholders' equity section of the consolidated balance sheet. In 2019, unrealized gains of $5.7 million resulted in a deferred tax liability of $1.2 million. In 2018, unrealized losses of $17.7 million resulted in a deferred tax asset of $4.7 million.

At December 31, 2019, the Company's net deferred tax assets ("DTAs") of $16.5 million consists of approximately $12.9 million of net U.S. federal DTAs and $3.5 million of net state DTAs.

Management assesses the necessity of a valuation allowance recorded against DTAs at each reporting period. The determination of whether a valuation allowance for net DTAs is appropriate is subject to considerable judgment and requires an evaluation of all positive and negative evidence. Based on an assessment of all of the evidence, including favorable trending in asset quality and certainty regarding the amount of future taxable income that the Company forecasts, management concluded that it was more likely than not that its net DTAs will be realized based upon future taxable income. Management's confidence in the realization of projected future taxable income is based upon analysis of the Company's risk profile and its trending financial performance, including credit quality. The Company believes it can confidently and reasonably predict future results of operations that result in taxable income at sufficient levels over the future period of time that the Company has available to realize its net DTA.

A valuation allowance could be required in future periods based on the assessment of positive and negative evidence. Management's conclusion at December 31, 2019 that it is more likely than not that the net DTAs of $16.5 million will be realized is based upon estimates of future taxable income that are supported by internal projections which consider historical performance, various internal estimates and assumptions, as well as certain external data, all of which management believes to be reasonable although inherently subject to judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, a valuation allowance may need to be recorded for some or all of the Company's DTAs. The establishment of a DTA valuation allowance could have a material adverse effect on the Company's financial condition and results of operations.

Management expects to realize the $16.5 million in net DTAs well in advance of the statutory carryforward period. At December 31, 2019, approximately $3.6 million of DTAs relate to federal net operating losses which will expire in annual installments beginning in 2029 through 2032. Additionally, $1.1 million of the DTAs relate to state net operating losses which will expire in annual installments beginning in 2029 through 2034. Remaining DTAs are not related to net operating losses or credits and therefore, have no expiration date.

The Company recognizes interest and penalties, as appropriate, as part of the provisioning for income taxes. No interest or penalties were accrued at December 31, 2019.

In accordance with ASC Topic 718, Compensation – Stock Compensation, the Company recognized $0.8 million, $1.1 million and $1.1 million in 2019, 2018 and 2017, respectively, of discrete tax benefits related to share-based compensation.

In accordance with ASC Topic 323, Investments-Equity Method and Joint Ventures, amortization of the Company's low-income housing credit investment of $0.9 million, $1.0 million and $0.7 million has been reflected as income tax expense for the years ended December 31, 2019, 2018 and 2017, respectively. The amount of affordable housing tax credits, amortization and tax benefits recorded as income tax expense for the year ended December 31, 2019 were $0.8 million, $0.9 million, and $0.2 million, respectively. The amount of affordable housing tax credits, amortization and tax benefits recorded as income tax expense for the year ended December 31, 2018 were $0.8 million, $1.0 million and $0.2 million, respectively. The amount of affordable housing tax credits, amortization and tax benefits recorded as income tax expense for the year ended December 31, 2017 were $0.6 million, $0.7 million and $0.3 million, respectively. The carrying value of the investment in affordable housing credits is $7.4 million and $8.3 million at December 31, 2019 and 2018, respectively, of which $0.5 million and $3.2 million, respectively, is unfunded.

The Company has no unrecognized income tax benefits or provisions due to uncertain income tax positions. The following are the major tax jurisdictions in which the Company operates and the earliest tax year, exclusive of the impact of the net operating loss carryforwards, subject to examination:



Jurisdiction	Tax Year
United States of America	2016
Florida	2016

Enactment of the Tax Cuts and Jobs Act of 2017 ( the "Tax Reform Act") required the Company to revalue its existing net DTA based on the future federal corporate tax rate of 21%. The DTA revaluation resulted in a one-time charge to income tax expense in 2017 in the amount of $8.6 million. Upon the filing of the Company's 2017 income tax return, a $0.2 million tax benefit was recorded in 2018 to true-up the initial estimate. No further adjustments related to the Tax Reform Act are expected.

In September 2019, the State of Florida announced a reduction in the corporate income tax rate from 5.5% to 4.458% for the years 2019, 2020 and 2021. This change resulted in additional income tax expense of $1.1 million upon the write down in the third

quarter of 2019 of deferred tax assets affected by the change, offset by a $0.4 million benefit upon adjusting the year-to-date provision to the new statutory tax rate.