ATLANTIC CAPITAL BANCSHARES, INC.

INCOME TAXES

The components of income tax expense included in the Consolidated Statements of Operations for the years ended were as follows:



(in thousands)	2017			2016		2015
Current income tax expense (benefit):
Federal	$	(7	)	$	4,497	$	1,204
State	140			130		270
Total	133			4,627		1,474

Deferred income tax expense (benefit):
Federal	24,354			2,679		(504		)
State	(113		)	643		(176		)
Total	24,241			3,322		(680		)
Total income tax	$	24,374		$	7,949	$	794

The income tax expense differs from the statutory rate of 35% in 2017, 2016 and 2015, as indicated in the following analysis:



(in thousands)	2017			2016			2015

Tax expense (benefit) based on federal statutory rate	$	7,227		$	7,470		$	(184	)
State taxes, net of federal benefit	170			716			(78		)
Income tax credits	(208		)	(51		)	(48		)
Tax-exempt earnings	(1,221		)	(893		)	(791		)
Nondeductible merger related expenses	—			178			1,152
Excess benefit	(298		)	—			—
Excess parachute payments under Section 280G	—			115			319
Nondeductible expenses	361			322			441
Federal rate adjustment	—			—			(27		)
Change in uncertain tax positions reserve	(109		)	8			79
Change in valuation allowance	(649		)	—			—
Revaluation of deferred tax asset excluding valuation allowance due to tax reform	18,983			—			—
Other	118			84			(69		)
Total income tax	$	24,374		$	7,949		$	794

Deferred income tax assets and liabilities result from differences between assets and liabilities measured for financial reporting purposes and for income tax return purposes. These assets and liabilities are measured using the enacted tax rates and laws. The net deferred tax asset is included as a component of other assets at December 31, 2017 and 2016, and is comprised of the following:



(in thousands)	2017			2016
Net operating loss carryforward	$	29,754		$	46,334
Federal tax credits	5,648			5,505
State credits	482			96
Allowance for loan losses	4,794			7,966
Stock-based compensation	912			1,226
Deferred loan fees and costs, net	—			1,369
Other real estate owned	305			711
Goodwill and other intangibles	—			212
Transaction costs	803			1,483
Unfunded commitments	224			262
Organizational costs	145			274
Nonaccrual loan interest	402			278
Net unrealized losses on investment securities available‑for‑sale	1,396			3,709
Net unrealized losses on cash flow hedges	172			—
Long term incentive plan	562			1,649
Other	407			857
Total gross deferred tax assets	46,006			71,931
Less: valuation allowance	(8,532		)	(9,181		)
Net deferred tax asset	37,474			62,750

Unrealized gains on cash flow hedges	—			191
Depreciation	765			772
Deferred loan costs	241			—
Other	245			214
Total gross deferred tax liabilities	1,251			1,177
Net deferred tax assets	$	36,223		$	61,573

On December 22, 2017, the 2017 Tax Cuts and Jobs Act (“the Tax Act”) was enacted into law. The Tax Act reduces the U.S. statutory corporate tax rate from 35% to 21% for tax years beginning in 2018, which resulted in the remeasurement of the federal portion of our deferred tax assets as of December 31, 2017, from 35% to the new 21% tax rate.

In assessing the realizability of deferred tax assets, management considers whether it is more‑likely-than-not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is provided when it is deemed more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the ability to realize the deferred tax assets, management considers the four possible sources of taxable income including future reversals of existing taxable temporary differences, future taxable income, taxable income in prior carryback years and tax-planning strategies that would, if necessary, be implemented. At December 31, 2015, the Company recorded a valuation allowance of $9.5 million. This valuation allowance related to the portion of net operating losses and credits that the Company will not be able to utilize due to limitations under Section 382 of the Internal Revenue Code. At December 31, 2016, the Atlantic Capital decreased the valuation allowance to $9.2 million. The adjustment to the valuation allowance related to a decrease in the federal net operating loss expected to be utilized and increases in certain state carryforwards that are expected to be utilized. At December 31, 2017, the Company increased the valuation allowance by $0.9 million for certain state carryforwards that are expected to expire before being utilized. This was offset by a $1.6 million reduction to the valuation allowance due to the change in Federal tax rate that is applied to attributes for which a valuation allowance exists.

ASC 740-10-65 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has reviewed and evaluated the relevant technical merits of each of its tax positions in accordance with ASC 740-10-65 and determined there are no uncertain tax positions that would have a material impact on the financial statements of the Company as of December 31, 2017.

A reconciliation of the beginning and ending unrecognized tax benefit related to uncertain tax positions is as follows:



(in thousands)	2017			2016
Balance at beginning of year	$	319		$	311
Additions based on tax positions related to the current year	14			8
Settlement of prior year positions	(117		)	—
Balance at end of year	$	216		$	319

The amount of unrecognized tax positions that would have impacted the effective tax rate if recognized was $171,000.

With the adoption of ASC 740-10-65, the Company elected to recognize accrued interest and penalties related to any future unrecognized tax benefits in current income tax expense. Interest in the amount of $40,000 and $39,000 was accrued as of December 31, 2017 and 2016, respectively. The total amount of interest and penalties recognized in current income tax expense during 2017, 2016 and 2015 was $30,000, $32,000 and $7,000, respectively.

At December 31, 2017, Atlantic Capital has operating loss carryforwards for federal income tax purposes of $111.2 million which are available to offset future federal taxable income, if any, through 2035. Atlantic Capital has operating loss carryforwards for state income tax purposes of $125.2 million, which are available to offset future state taxable income, if any, through 2035. In addition, Atlantic Capital has general business credits of approximately $5.4 million, which are available to reduce future federal income taxes, if any through 2035. Atlantic Capital has alternative minimum tax credit carryforwards of approximately $329,000 available to reduce future federal regular income taxes, if any, over an indefinite period.

The Company’s income tax returns remain subject to examination by both U.S. federal and state jurisdictions for tax years 2014 forward.

As of December 31, 2017, the Company recorded a net income tax expense for the estimated effects of the Tax Act of $17.4 million, which was primarily due to the remeasurement of the Company’s estimated deferred tax assets and deferred tax liabilities to reflect the new federal rate of 21%. However, as additional information becomes available and additional analysis is completed, the estimate of the deferred tax assets and deferred tax liabilities may change, which could impact the remeasurement of those deferred tax balances. Any adjustment would be recorded to the provision for income taxes in 2018 in the period the amounts are determined.