CENTRAL PACIFIC FINANCIAL CORP

20. INCOME AND FRANCHISE TAXES

Components of income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 were as follows:



	Current			Deferred		Total
	(Dollars in thousands)
Year ended December 31, 2017
Federal	$	1,727		$	27,263	$	28,990
State	(81		)	4,943		4,862
Total	$	1,646		$	32,206	$	33,852



	Current			Deferred		Total
	(Dollars in thousands)
Year ended December 31, 2016
Federal	$	805		$	19,842	$	20,647
State	(4		)	4,585		4,581
Total	$	801		$	24,427	$	25,228



	Current			Deferred		Total
	(Dollars in thousands)
Year ended December 31, 2015
Federal	$	1,128		$	20,061	$	21,189
State	(119		)	6,018		5,899
Total	$	1,009		$	26,079	$	27,088

On December 22, 2017, H.R.1, commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform”) was signed into law making significant changes to the U.S. federal tax code. The most impactful, as related to the Company, included a decrease in the current U.S. federal corporate tax rate from 35% to 21% for the year beginning January 1, 2018. The estimated impact of Tax Reform on the Company's net deferred tax assets ("DTA") result in additional income tax expense of $7.4 million. The Company notes that it anticipates additional adjustments to the net DTA and income tax expense will be made in 2018 as deferred tax estimates are finalized for inclusion in the 2017 Federal and state income tax returns to be filed.

Income tax expense (benefit) for the periods presented differed from the "expected" tax expense (computed by applying the U.S. federal corporate tax rate of 35% to income (loss) before income taxes) for the following reasons:



	Year Ended December 31,
	2017			2016			2015
	(Dollars in thousands)
Computed "expected" tax expense (benefit)	$	26,270		$	25,260		$	25,535
Increase (decrease) in taxes resulting from:
Tax-exempt interest	(1,387		)	(1,410		)	(1,420		)
Other tax-exempt income	(1,186		)	(940		)	(712		)
Low-income housing and energy tax credits	(1,135		)	(899		)	(946		)
State income taxes, net of Federal income tax effect, excluding impact of deferred tax valuation allowance	3,145			2,981			3,834
Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets allocated to income tax expense	570			(52		)	(44		)
Estimated impact of Tax Reform on net deferred tax assets	7,440			—			—
Other, net	135			288			841
Total	$	33,852		$	25,228		$	27,088

As required under the provisions of ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" during 2017, the Company recorded an income tax benefit of $0.5 million as a result of excess tax benefits from restricted stock units vesting during the year.

At December 31, 2017, there was $6.7 million of current federal income tax receivable, compared to a $28 thousand payable at December 31, 2016. Current state income taxes receivable were $6 thousand and $4 thousand at December 31, 2017 and 2016, respectively.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:



	December 31,
	2017		2016
	(Dollars in thousands)
Deferred tax assets
Allowance for loan and lease losses	$	10,622	$	19,926
Accrued expenses	294		644
Employee retirement benefits	2,784		6,138
Federal and state tax credit carryforwards	12,473		33,803
Federal and state net operating loss carryforwards	3,306		2,732
Restricted stock and non-qualified stock options	661		412
Premises and equipment	3,633		4,106
Other	3,169		5,060
Total deferred tax assets	36,942		72,821

Deferred tax liabilities
Intangible assets	4,785		8,138
Other	2,343		3,006
Total deferred tax liabilities	7,128		11,144

Less: Deferred tax valuation allowance	3,321		2,751

Net deferred tax assets	$	26,493	$	58,926

In assessing the realizability of our net DTA, management considers whether it is more likely than not that some portion or all of the DTA will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax-planning strategies in making this assessment.

As of December 31, 2017, the valuation allowance on our net DTA totaled $3.3 million, which related entirely to our DTA from net apportioned net operating loss ("NOL") carryforwards for California state income tax purposes as we do not expect to generate sufficient income in California to utilize the DTA. The net change in the valuation allowance was an increase of $0.6 million in 2017, compared to a decrease of $0.1 million in 2016.

Net of this valuation allowance, the Company's net DTA totaled $26.5 million as of December 31, 2017, compared to a net DTA of $58.9 million as of December 31, 2016.

At December 31, 2017, the Company had net apportioned NOL carryforwards for California state income tax purposes of $3.3 million, which are available to offset future state taxable income, if any, through 2031. The Company did not have any NOL carryforwards for U.S. federal or Hawaii state income tax purposes. In addition, we have state tax credit carryforwards of $11.3 million that do not expire. In 2017, we utilized the remainder of our federal tax credit carryforwards. Additionally, there are $1.2 million in net Hawaii state tax credit benefits related to the carryback of net operating loss filed in the amended 2008 Hawaii tax return.

At December 31, 2017, we have no unrecognized tax benefits that, if recognized would favorably affect the effective income tax rate in future periods. We do not expect our unrecognized tax benefits to change significantly over the next 12 months.

We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Taxable years through 2013 are closed.