INCOME TAXES

12 Months Ended

Dec. 31, 2018

On December 22, 2017, the Tax Act was signed into law, reducing the corporate income tax rate from 35% to 21%. At December 31, 2017, the Company had not completed its accounting for the tax effect of enactment of the Tax Act; however, it made a reasonable estimate of the effects on its existing deferred tax balances. As a result of this rate reduction, the Company remeasured certain deferred tax assets and liabilities at December 31, 2017 based on the rates at which they are expected to reverse in the future, which is generally 21% for Federal tax purposes. This remeasurement of deferred tax assets and liabilities resulted in a provisional amount recorded of $1.9 million. Also at December 31, 2017, the Company had also recognized a provisional estimate of $466,000 to reassess the value of its low income housing projects investments ("LIHTC investments").

As of December 31, 2018, the Company completed its accounting for all of the enactment-date income tax effects of the Tax Act. The Company's tax expense for the year ended December 31, 2018 included an increase of $71,000 related to the provisional estimate recorded on the remeasurement of deferred tax asset and liabilities in 2017, mainly attributable to remeasurement of temporary differences. There was no change to this provisional amount recorded in 2017 related to the Company's LIHTC investments. The impact of these provisional amounts are included in the disclosures below.

The provision for income taxes is comprised of the following components:



	Years Ended December 31
	2018			2017		2016
	(Dollars in thousands)
Current expense
Federal	$	25,129		$	28,852	$	26,549
State	13,672			9,278		8,883
Total current expense	38,801			38,130		35,432
Deferred expense (benefit)
Federal	(3,080		)	7,953		153
State	(1,417		)	1,258		(158		)
Total deferred expense (benefit)	(4,497		)	9,211		(5		)
Total expense	$	34,304		$	47,341	$	35,427

The difference between the statutory federal income tax rate and the effective income tax rate reported for the last three years is detailed below:



	Years Ended December 31
	2018					2017					2016
	(Dollars in thousands)
Computed statutory federal income tax provision	$	32,744		21.00	%	$	47,091		35.00	%	$	39,226		35.00	%
State taxes, net of federal tax benefit	9,633			6.18	%	6,817			5.07	%	5,643			5.03	%
Merger and other related costs (non-deductible)	130			0.08	%	213			0.16	%	210			0.19	%
Change in valuation allowance	49			0.03	%	31			0.02	%	28			0.02	%
Revaluation of net deferred tax assets	—			—	%	1,895			1.41	%	—			—	%
New Markets Tax Credits	(3,960		)	(2.54	)%	(3,960		)	(2.94	)%	(6,360		)	(5.67	)%
Increase in cash surrender value of life insurance	(1,160		)	(0.74	)%	(1,445		)	(1.07	)%	(1,431		)	(1.28	)%
Low Income Housing Project Investments	(1,030		)	(0.66	)%	(1,253		)	(0.93	)%	(1,641		)	(1.46	)%
Stock-based compensation	(885		)	(0.57	)%	(1,258		)	(0.94	)%	—			—	%
Nontaxable interest, net	(566		)	(0.36	)%	(987		)	(0.73	)%	(996		)	(0.89	)%
Other, net	(651		)	(0.42	)%	197			0.15	%	748			0.67	%
Total expense	$	34,304		22.00	%	$	47,341		35.20	%	$	35,427		31.61	%

The tax-effected components of the net deferred tax asset at December 31 were as follows:



	2018			2017
	(Dollars in thousands)
Deferred tax assets
Accrued expenses not deducted for tax purposes	$	11,922		$	9,268
Allowance for loan losses	17,764			16,702
Deferred gain on sale leaseback transaction	704			909
Employee and director equity compensation	1,636			1,559
Federal Home Loan Bank borrowings fair value adjustment	15			26
Loan basis difference fair value adjustment	4,761			3,070
Net operating loss carry-forward	170			127
Net unrealized loss on securities available for sale	1,850			106
Other	842			527
Gross deferred tax assets	39,664			32,294
Valuation allowance	(170		)	(121		)
Total deferred tax assets net of valuation allowance	$	39,494		$	32,173
Deferred tax liabilities
Core deposit and other intangibles	$	3,803		$	2,057
Deferred loan fees, net	4,759			4,275
Derivatives fair value adjustment	2,413			524
Fixed assets	5,259			5,270
Goodwill	10,388			10,265
Prepaid pension	3,483			3,056
Other	1,139			1,251
Gross deferred tax liabilities	$	31,244		$	26,698
Total net deferred tax asset	$	8,250		$	5,475

Deferred tax assets are to be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of the tax benefit depends upon the existence of sufficient taxable income within the carry-back and future periods.

The Company believes that it is more likely than not that its deferred tax assets as of December 31, 2018, excluding the deferred tax asset on certain state net operating losses, will be realized through the utilization of carry-back provisions to taxable income on prior years, future reversals of existing taxable temporary differences and by offsetting other future taxable income. The Company believes it is more likely than not that the deferred tax asset related to certain state net operating losses generated from the Company's investments in low income housing partnerships, which expire over a 20-year period, will not be realized and has recorded a valuation allowance of $170,000 at December 31, 2018, attributable to this deferred tax asset.

The Company does not have a federal net operating loss carry forward or general business credit carry forward subject to expiration as of December 31, 2018.

Uncertainty in Income Taxes

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction as well as in various states. The Company is subject to U.S. federal, state and local income tax examinations by tax authorities for the 2015 through 2017 tax years including any related income tax filings from its recent acquisitions. The Company believes that its income tax returns have been filed based upon applicable statutes, regulations and case law in effect at the time of filing, however, the Internal Revenue Service ("IRS") and /or state jurisdictions could disagree with the Company's interpretation upon examination. The Company accounts for uncertainties in income taxes by providing a tax reserve for certain positions. The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits:



	(Dollars in thousands)
Balance at December 31, 2016	$	111
Increase for current year tax positions	31
Balance at December 31, 2017	142
Increase for current year tax positions	73
Balance at December 31, 2018	$	215

Increases to the Company's unrealized tax positions occur as a result of accruing for the unrecognized tax benefit as well the accrual of interest and penalties related to prior year positions. Decreases in the Company's unrealized tax positions occur as a result of the statute of limitation lapsing on prior year positions and/or settlements relating to outstanding positions. The table above does not include the indirect federal benefit of state tax positions of approximately $39,000. All of the Company’s unrecognized tax benefits, including the indirect federal benefit of state tax positions, are recorded as a component of income tax expense. During the years ended December 31, 2018, 2017 and 2016 the Company recognized approximately $24,000, $18,000 and $11,000 in the provision for income taxes for interest and penalties related to uncertain tax positions. As such, the Company has accrued approximately $53,000, $29,000 and $11,000 for the payment of interest and penalties as of December 31, 2018, 2017 and 2016, respectively, which are not included in the table above.