Income Taxes

The provision for income taxes is as follows:



	For the Year Ended December 31,
(In thousands)	2018		2017		2016
Current
Federal	$	9,078	$	667	$	653
State	—		2		30

Deferred
Federal	7,018		32,791		12,163
State	4,163		2,876		2,043
	$	20,259	$	36,336	$	14,889

The difference between the total expected tax benefit (computed by applying the U.S. Federal tax rate of 21% to pretax income in 2018 and 35% in 2017 and 2016) and the reported income tax provision relating to income before income taxes is as follows:



	For the Year Ended December 31,
(In thousands)	2018			2017			2016
Tax rate applied to income before income taxes	$	18,381		$	27,720		$	15,431
Increase (decrease) resulting from the effects of:
Tax law change	—			8,552			—
Nondeductible acquisition costs	207			657			217
Tax exempt interest on loans, obligations of states and political subdivisions and bank owned life insurance	(667		)	(1,445		)	(1,215		)
State income taxes	(874		)	(1,007		)	(726		)
Tax credit investments	(33		)	(165		)	(55		)
Stock compensation	(918		)	(1,027		)	(731		)
Other	—			173			(105		)
Federal tax provision	16,096			33,458			12,816
State tax provision	4,163			2,878			2,073
Total income tax provision	$	20,259		$	36,336		$	14,889

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



	December 31,
(In thousands)	2018			2017
Allowance for loan losses	$	8,592		$	7,187
Premises and equipment	1,670			1,390
Other real estate owned	207			207
Accrued stock compensation	2,547			1,569
Federal tax loss carryforward	4,699			4,755
State tax loss carryforward	2,912			5,578
Alternative minimum tax credit carryforward	—			2,209
Net unrealized securities losses	4,658			1,429
Deferred compensation	2,287			2,125
Accrued interest and fee income	7,674			2,411
Other	1,627			2,248
Gross deferred tax assets	36,873			31,108
Less: Valuation allowance	—			—
Deferred tax assets net of valuation allowance	36,873			31,108

Core deposit base intangible	(5,706		)	(3,964		)
Other	(2,213		)	(1,727		)
Gross deferred tax liabilities	(7,919		)	(5,691		)
Net deferred tax assets	$	28,954		$	25,417

Included in the table above is the effect of certain temporary differences for which no deferred tax expense or benefit was recognized. The effect of these items is recorded as Accumulated Other Comprehensive Income in the shareholders' equity section of the consolidated balance sheet. In 2018 and 2017 such items consisted primarily of $4.7 million and $1.4 million on $17.7 million and $5.6 million, respectively, of unrealized losses on certain investments in debt securities accounted for under ASC Topic 320.

At December 31, 2018, the Company's net deferred tax assets ("DTAs") of $29.0 million consists of approximately $20.5 million of net U.S. federal DTAs and $8.5 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, 2018 that it is more likely than not that the net DTAs of $29.0 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 $29.0 million in net DTAs well in advance of the statutory carryforward period. At December 31, 2018, approximately $4.7 million of DTAs relate to federal net operating losses which will expire in annual installments beginning in 2029 through 2032. Additionally, $2.9 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, 2018.

In March 2016, the FASB issued ASU No. 2016-9, Improvements to Employee Share-Based Payment Accounting, Compensation – Stock Compensation (Topic 718). ASU 2016-9 changed several aspects of the accounting for share-based payment award transactions, including: (1) accounting and cash flow classification for excess tax benefits and deficiencies, (2) forfeitures, and (3) tax withholding requirements and cash flow classification. The Company adopted ASU 2016-9 in the third quarter of 2016 and recognized a $0.8 million tax benefit in the Consolidated Statements of Operations over the third and fourth quarters of 2016. During 2018 and 2017, the Company recognized $1.1 million and $1.1 million, respectively, of tax benefit under this standard. In addition, the Company presented excess tax benefits as an operating activity in the Consolidated Statement of Cash Flows using a retrospective transition method.

As a result of the adoption in 2016 of ASU No. 2014-1, “Investments-Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects," amortization of our low-income housing credit investment of $1.0 million, $0.7 million and $39,000 has been reflected as income tax expense for the years ended December 31, 2018, 2017 and 2016, 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, $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 amount of affordable housing tax credits, amortization and tax benefits recorded as income tax expense for the year ended December 31, 2016 were $32,000, $39,000 and $67,000, respectively. The carrying value of the investment in affordable housing credits is $8.3 million and $9.3 million at December 31, 2018 and 2017, respectively, of which $3.2 million and $5.2 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	2015
Florida	2015

On December 22, 2017 H.R. 1, also known as the Tax Cuts and Jobs Act ( the "Tax Reform Act), was enacted. As a result, the Company was required to revalue its existing net DTA on that date based on the future federal corporate tax rate of 21%. The DTA revaluation resulted in a one-time charge to income tax expense in the amount of $8.6 million. Prior to enactment of this legislation, the Company's net DTA was $34.0 million which was then revalued to the $25.4 million reflected in the table above. The tax charge was initially estimated by the Company and was permitted to be adjusted in future periods following evaluation of the effects, if any, of implementation guidance or regulations that may be issued by the Internal Revenue Service on the Company's initial analysis of the Tax Reform Act. 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 2017, the Company early adopted ASU 2018-2, as discussed in Note A - Significant Accounting Policies, to adjust for the historical impact of the corporate tax rate change to accumulated other comprehensive income. The adjustment relates to changes in the deferred tax asset associated with mark to market adjustments on available for sale securities. The table below reflects the balances before and after the adjustment between accumulated other comprehensive income and retained earnings:



(In thousands)	Unadjusted as of December 31, 2017			Adjustment			Adjusted as of December 31, 2017
Retained Earnings	$	29,208		$	706		$	29,914
Accumulated Other Comprehensive Income	(3,510		)	(706		)	(4,216		)