Note 13. Income Taxes



Income tax expense included in net income consisted of the following components:







On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law.  The Tax Act made significant changes to U.S. corporate income tax by, among other things, reducing the corporate federal income tax rate from 35% to 21%, eliminating or reducing certain deductions, and providing for immediate expensing of certain qualified property.  U.S. GAAP requires the effects of changes in tax rates and laws upon deferred tax balances to be recognized in the period in which the legislation is enacted. Accordingly, the Company re-measured its deferred tax assets and liabilities based upon the newly enacted U.S. statutory federal income tax rate of 21%, which is the tax rate at which these assets and liabilities are expected to reverse in the future. The re-measurement resulted in a  $19.5 million charge to income tax expense for the year ended December 31, 2017, comprised of $25.3 million of expense related to certain items included within AOCI, and a provisional income tax benefit of $5.8 million related to items included in continuing operations.



The provisional benefit is a reasonable estimate as the Company has not completed its analysis of the impact of the Tax Act and the related calculations that could affect the measurement of deferred tax assets and liabilities arising from items included in Company operations. The SEC’s Staff Accounting Bulletin No. 118 permits the recording of provisional amounts related to the impact of the Tax Act during a measurement period which is not to exceed one year from the enactment date of the Tax Act. Adjustments to the provisional amount may occur during the measurement period as the Company continues to collect information, finalize calculations and interpret any additional guidance provided by the IRS or other regulatory agencies.  Any such adjustments may materially impact income tax expense in the period in which the adjustments are made.



Except for the charge due to the re-measurement of the net deferred tax asset related to AOCI, income tax expense does not reflect the tax effects of amounts recognized in other comprehensive income and in AOCI, a separate component of stockholders’ equity.  These amounts include unrealized gains and losses on securities available for sale or transferred to held to maturity, unrealized gains and losses on derivatives and hedging transactions, and valuation adjustments of defined benefit and other post-retirement benefit plans. Refer to Note 11 for additional information on stockholder’s equity and AOCI.



Temporary differences arise between the tax bases of assets or liabilities and their carrying amounts for financial reporting purposes. The expected tax effects from when these differences are resolved are recorded currently as deferred tax assets or liabilities.



Significant components of the Company’s deferred tax assets and liabilities were as follows:







Reported income tax expense differed from amounts computed by applying the statutory income tax rate of 35% to earnings before income taxes. The primary differences are due to tax-exempt income, federal and state tax credits and, for 2017, excess tax benefits from stock-based compensation and tax expense due to enactment of the Tax Act. The main source of tax credits has been investments in tax-advantaged securities and tax credit projects. See the table in the income tax section of the MD&A for additional information regarding federal and state tax credits. A summary of the factors that impacted income tax expense follows.







As of December 31, 2017, the Company had approximately $21.3 million in federal and state tax credit carryforwards that originated in the tax years from 2011 through 2017. The federal and state carryforwards begin expiring in 2035 and 2021, respectively. These carryforwards are primarily from investments in federal and state NMTC projects and federal AMT credit. The Tax Act permanently repealed the corporate alternative minimum tax (“AMT”) beginning after December 31, 2017. The AMT credit carryforward can be utilized to offset the regular tax liability with any remaining carryforward refundable by 2022. As of December 31, 2017, the AMT credit carryover of $10.2 million is recorded in the deferred tax asset balance. The Company expects to recover the entire amount through a reduction of its regular tax liability.



The Company had approximately $31.4 million in state net operating loss carryforwards that originated in the tax years 2004 through 2017 and that begin expiring in 2024. A valuation allowance has been established for the state net operating loss carryforwards. The impact of this valuation allowance is immaterial to the financial statements.



The tax benefit of a position taken or expected to be taken in a tax return should be recognized when it is more likely than not that the position will be sustained on its technical merits. The liability for unrecognized tax benefits was immaterial at December 31, 2017,  2016 and 2015. The Company does not expect the liability for unrecognized tax benefits to change significantly during 2018.  The Company recognizes interest and penalties, if any, related to income tax matters in income tax expense, and the amounts recognized during 2017,  2016 and 2015 were insignificant.  



The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various state returns. Generally, the returns for years prior to 2014 are no longer subject to examination by taxing authorities.