FIDELITY SOUTHERN CORP

Income Tax

The components of income tax expense for the years ended December 31, 2017, 2016, and 2015, were as follows:



	For the Years Ended December 31,
(in thousands)	2017		2016		2015
Current:
Federal	$	12,487	$	13,493	$	14,868
State	539		640		896
Total current taxes	13,026		14,133		15,764
Deferred:
Federal	1,467		6,279		5,344
State	766		1,731		1,186
Total deferred taxes	2,233		8,010		6,530
Total income tax expense	$	15,259	$	22,143	$	22,294

A reconciliation of income tax expense computed at the statutory federal income tax rate to actual income tax expense is presented in the following table for the years ended December 31, 2017, 2016, and 2015:



	For the Years Ended December 31,
	2017					2016					2015
($ in thousands)	Amount			%		Amount			%		Amount			%
Taxes at statutory rate	$	19,269		35.0	%	$	21,318		35.0	%	$	21,500		35.0	%
Increase (reduction) in income taxes resulting from:
State income tax, net of credits and Federal income tax	771			1.4		1,541			2.5		1,353			2.2
Employee compensation and benefit plans, net	(211		)	(0.4	)	(654		)	(1.0	)	(630		)	(1.0	)
Tax exempt interest income	(167		)	(0.3	)	(230		)	(0.4	)	(244		)	(0.4	)
Benefit due to enactment of federal tax reform	(4,903		)	(8.9	)	—			—		—			—
Other, net	500			0.9		168			0.3		315			0.5
Income tax expense	$	15,259		27.7	%	$	22,143		36.4	%	$	22,294		36.3	%

Deferred taxes are provided using the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Tax Cuts and Jobs Act ("Tax Act"), which was enacted on December 22, 2017, made significant changes to the U.S. tax law, including the reduction of the corporate income tax rate from 35% to 21%. As a result of enactment, we remeasured our 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 and, as noted above, recognized a tax benefit related to the remeasurement of $4.9 million.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. As such, the company's financial results reflect the income tax effects of the Tax Act for which the accounting under ASC 740 is complete and provision amounts for those specific income tax effects of the Tax Act for which the accounting under ASC 740 is incomplete but a reasonable estimate could be determined. As additional information becomes available and additional analysis is completed, the estimate of the of the deferred tax assets and liabilities may change, which could impact the remeasurement of the deferred tax balances. Any adjustment would be recorded as an adjustment to the provision for income taxes in 2018 in the period the amounts are determined.

As of December 31, 2017, and 2016, net deferred income tax liabilities totaling $7.0 million, and $5.0 million, respectively, are recorded on the Company’s Balance Sheet. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2017, and 2016, are presented in the table below:



	December 31,
	2017					2016
(in thousands)	Assets			Liabilities		Assets			Liabilities
Allowance for loan losses	$	7,575		$	—	$	11,571		$	—
Mortgage servicing rights	—			21,566		—			26,857
Accelerated depreciation	—			1,637		—			2,721
Deferred loan fees, net	553			—		2,433			—
Deferred compensation	2,334			—		2,541			—
ORE	317			—		524			—
State tax carryforward	2,312			—		1,724			—
Unrealized gains on investment securities available-for-sale	—			159		—			424
Stock benefits/compensation	1,032			—		1,580			—
FDIC acquired assets	306			—		331			—
Loan mark-to-market adjustment	479			—		1,088			—
Net operating losses	1,497			—		2,708			—
Deductible prepaids	—			333		—			214
Other	660			379		1,179			504
Total	$	17,065		$	24,074	$	25,679		$	30,720

Net deferred tax liability	$	(7,009	)			$	(5,041	)

Based on management’s belief that it is more likely than not that all net deferred tax asset benefits will be realized, there was no valuation allowance at December 31, 2017, and 2016. At December 31, 2017, the Company had $2.3 million in state tax credit carryforwards which expire between 2018 and 2025. There is a federal net operating losses of $7.1 million that will begin to expire in 2030. There are also state net operating losses of approximately $12.6 million that begin expiring in 2029.

The Company is subject to the possibility of a tax audit in numerous jurisdictions in the U.S. until the applicable expiration of the statutes of limitations. For federal and state purposes, the Company is no longer subject to tax examinations by tax authorities for tax years before 2014.

There were no unrecognized tax benefits at December 31, 2017, or 2016 that, if recognized, would affect the Company’s effective tax rate.