MIDSOUTH BANCORP INC

INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law which reduced the federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. During the fourth quarter of 2017, the Company's net deferred tax assets were revalued at the new tax rate, and this adjustment resulted in a $3.6 million increase to income tax expense.

The Company early adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, for the fiscal year ending December 31, 2017, which allowed a one-time reclassification of $324,000 from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows (in thousands):



	2017 ⁽¹⁾		2016
Deferred tax assets:
Allowance for loan losses	$	5,860	$	9,177
Loss on transfer of loans to held-for-sale	1,266		—
Unrealized losses on securities	713		890
Write-down on assets held-for-sale	285		—
Core deposit intangible	153		37
Deferred compensation	358		696
Other	667		640
Total deferred tax assets	9,302		11,440
Deferred tax liabilities:
Premises and equipment	1,589		3,318
Goodwill	1,321		1,820
FHLB stock dividends	57		80
Unrealized gains on cash flow hedges	226		346
Prepaid expenses	220		306
Purchase accounting adjustments on securities	392		753
Other	105		245
Total deferred tax liabilities	3,910		6,868
Net deferred tax asset	$	5,392	$	4,572

(1) For 2017, the amounts presented are reflective of the 21 percent tax rate.

Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company believes that it is more likely than not that it will realize the benefits of these deductible differences existing at December 31, 2017. Therefore, no valuation allowance is necessary at this time. The net deferred tax assets for 2017 and 2016 are included in other assets on the consolidated balance sheets.

Components of income tax (benefit) expense are as follows (in thousands):



	2017			2016			2015
Current	$	(1,719	)	$	5,439		$	6,368
Deferred benefit	(4,474		)	(1,582		)	(1,785		)
Write-down of net deferred tax asset resulting from the Tax Cuts and Jobs Act	3,595			—			—
Total income tax (benefit) expense	$	(2,598	)	$	3,857		$	4,583

The provision for federal income taxes differs from the amount computed by applying the U.S. Federal income tax statutory rate of 35% on pre-tax income as follows (in thousands):



	December 31,
	2017			2016			2015
Taxes calculated at statutory rate	$	(5,026	)	$	4,654		$	5,460
Increase (decrease) resulting from:
Tax-exempt interest, net	(524		)	(615		)	(766		)
Deferred compensation	(315		)	—			—
Write-down of net deferred tax asset resulting from the Tax Cuts and Jobs Act	3,595			—			—
Other	(328		)	(182		)	(111		)
	$	(2,598	)	$	3,857		$	4,583

The Company’s federal income tax returns are open and subject to examination from the 2014 tax return year and forward. The various state income and franchise tax returns are generally open from the 2014 and later tax return years based on individual state statutes of limitation. We are not currently under examination by federal or state tax authorities for the 2014, 2015, or 2016 tax years.