Income Taxes

12 Months Ended

Dec. 31, 2019

Income tax expense is as follows for the years indicated (in thousands):



	Year Ended December 31,
	2019		2018		2017
Current	$	38,082	$	17,185	$	5,451
Deferred	14,909		32,630		60,951
Increase in valuation allowance	—		—		413
Expense due to enactment of federal tax reform	—		—		38,198
Total income tax expense	$	52,991	$	49,815	$	105,013

The differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate of 21% in 2019 and 2018 and 35% in 2017 to income before income taxes are as follows for the years indicated (in thousands):



	Year Ended December 31,
	2019			2018			2017
Pretax income at statutory rates	$	50,130		$	45,344		$	60,492
Add (deduct):
State taxes, net of federal benefit	7,168			6,765			4,139
Bank owned life insurance earnings	(1,127		)	(747		)	(1,141		)
Adjustment to reserve for uncertain tax positions	84			80			59
Tax-exempt interest revenue	(1,827		)	(1,229		)	(1,199		)
Equity compensation	(375		)	(892		)	(799		)
Transaction costs	16			78			408
Tax credit investments	(464		)	(29		)	(89		)
Change in state statutory tax rate	—			583			81
Increase in valuation allowance	—			—			413
Release of disproportionate tax effects related to de-designated cash flow hedges	—			—			3,400
Expense due to enactment of federal tax reform	—			—			38,198
Other	(614		)	(138		)	1,051
Total income tax expense	$	52,991		$	49,815		$	105,013

On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. Among other things, the Tax Act reduced United’s corporate federal tax rate from 35% to 21% effective January 1, 2018. As a result, United was required to re-measure, through 2017 income tax expense, its deferred tax assets and liabilities using the enacted rate at which United expects them to be recovered or settled.

Also, on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance on accounting for the tax effects of the Tax Act. SAB118 provided a one-year measurement period from the Tax Act enactment date for companies to complete the related accounting under ASC Topic 740, Income Taxes (“ASC 740”). United’s 2017 financial results reflected both the income tax effects of the Tax Act for which the accounting was complete and provisional amounts for certain income tax effects of the Tax Act for which the accounting was incomplete, but a reasonable estimate could be determined. In 2017, United recorded a provisional amount of income tax expense of $38.2 million for the impact of the re-measurement of its deferred tax asset. No material adjustments to the provisional amount were recorded during the one-year measurement period.

The following summarizes the sources and expected tax consequences of future taxable deductions (revenue) which comprise the net deferred tax asset as of the dates indicated (in thousands):



	December 31,
	2019		2018
Deferred tax assets:
Allowance for loan losses	$	14,910	$	14,604
Net operating loss carryforwards	27,568		39,204
Deferred compensation	9,363		8,535
Loan purchase accounting adjustments	6,599		8,658
Reserve for losses on foreclosed properties	20		61
Nonqualified share based compensation	2,041		1,190
Accrued expenses	3,958		3,536
Investment in partnerships	67		426
Unamortized pension actuarial losses and prior service cost	1,739		1,606
Unrealized losses on securities available-for-sale	—		8,092
Unrealized losses on cash flow hedges	—		86
Lease liability	5,327		—
Other	2,038		1,235
Total deferred tax assets	73,630		87,233
Deferred tax liabilities:
Unrealized gains on securities available-for-sale	7,943		—
Acquired intangible assets	2,530		2,772
Premises and equipment	3,002		1,291
Loan origination costs	3,538		3,734
True tax leases	7,783		6,020
Prepaid expenses	373		398
Servicing assets	4,428		2,862
Derivatives	1,075		525
Right-of-use asset	4,809		—
Uncertain tax positions	1,792		2,036
Total deferred tax liabilities	37,273		19,638
Less valuation allowance	2,298		3,371
Net deferred tax asset	$	34,059	$	64,224

The change in the net deferred tax asset includes an increase of $203,000 due to current year merger and acquisition activity and the adoption of Topic 842.

At December 31, 2019, United had state net operating loss carryforwards of approximately $10.5 million that begin to expire in 2021, $3.71 million that begin to expire in 2027 and $197 million that begin to expire in 2031, if not previously utilized. United had $74.6 million in federal net operating loss carryforwards subject to annual limitation under IRC Section 382 that begin to expire in 2027, if not previously utilized. United had $4.33 million of state tax credits that begin to expire in 2025, if not previously utilized.

Management assesses the valuation allowance recorded against deferred tax assets at each reporting period. The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence. ASC 740 requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.

At December 31, 2019 and 2018, based on the assessment of all the positive and negative evidence, management concluded that it is more likely than not that nearly all of the net deferred tax asset will be realized based upon future taxable income. The valuation allowance of $2.30 million and $3.37 million, respectively, was related to specific state income tax credits that have short carryforward periods and certain acquired state net operating losses, both of which are expected to expire unused.

The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management’s conclusion at December 31, 2019 that it was more likely than not that the net deferred tax asset of $34.1 million will be realized is based on management’s estimate of future taxable income. Management’s estimate of future taxable income is based on internal forecasts 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 significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the valuation allowance may need to be increased for some or all of the deferred tax asset.

A reconciliation of the beginning and ending unrecognized tax benefit related to uncertain tax positions is as follows for the years indicated (in thousands):



	2019			2018			2017
Balance at beginning of year	$	3,264		$	3,163		$	3,892
Additions based on tax positions related to the current year	481			470			441
Decreases resulting from a lapse in the applicable statute of limitations	(375		)	(369		)	(351		)
Remeasurement due to enactment of federal tax reform	—			—			(819		)
Balance at end of year	$	3,370		$	3,264		$	3,163

Approximately $2.92 million of the unrecognized tax benefit at December 31, 2019 would increase income from continuing operations, and thus affect United’s effective tax rate, if ultimately recognized into income.

It is United’s policy to recognize interest and penalties accrued relative to unrecognized tax benefits in their respective federal or state income taxes accounts. There were no penalties and interest related to income taxes recorded in the income statement in 2019, 2018 or 2017. No amounts were accrued for interest and penalties on the balance sheet at December 31, 2019 or 2018.

United and its subsidiaries file a consolidated U.S. federal income tax return, as well as various state returns in the states where it operates. United’s federal and state income tax returns are no longer subject to examination by taxing authorities for years before 2016.