TRIUMPH BANCORP, INC.

NOTE 12 — INCOME TAXES

Income tax expense for the years ended December 31, 2017, 2016, and 2015 consisted of the following:

	Years Ended December 31,
(Dollars in thousands)	2017			2016			2015
Income tax expense:
Current	$	14,714		$	10,922		$	8,701
Deferred		10,174			1,941			666
Change in valuation allowance for deferred tax asset		(10	)		(54	)		(946	)
Income tax expense	$	24,878		$	12,809		$	8,421

Effective tax rates differ from federal statutory rates applied to income before income taxes due to the following:

	Years Ended December 31,
(Dollars in thousands)	2017			2016			2015
Tax provision computed at federal statutory rate	$	21,384		$	11,728		$	13,144
Effect of:
State taxes, net		1,112			852			1,444
Tax reform impact⁽¹⁾		2,984			—			—
Change in effective tax rate		—			—			(142	)
Bargain purchase gain		—			—			(5,291	)
Transaction costs		—			325			—
Bank-owned life insurance		(246	)		(201	)		(158	)
Tax exempt interest		(545	)		(129	)		(119	)
Change in valuation allowance for deferred tax asset		(10	)		(54	)		(946	)
Other		199			288			489
Income tax expense	$	24,878		$	12,809		$	8,421

⁽¹⁾ On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), resulting in significant modifications to existing law. As a result of the changes under the Tax Act, the Company recorded incremental income tax expense of $2,984,000 during the year ended December 31, 2017, which consisted primarily of the remeasurement of deferred tax assets and liabilities at the new federal statutory rate of 21%. Prior to the enactment of the Tax Act, deferred tax assets and liabilities were measured at the previous federal statutory rate of 35%. Authoritative guidance and interpretation by regulatory bodies is ongoing, and as such, the accounting for the effects of the Tax Act is not final and the full impact of the new regulation is still being evaluated.

Deferred income taxes reflect the net tax effects of temporary differences between the recorded amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows:

(Dollars in thousands)	2017			2016
Deferred tax assets
Federal net operating loss carryforwards	$	7,180		$	13,669
State net operating loss carryforwards		1,338			1,493
Acquired loan basis		1,159			4,888
Other real estate owned		394			2,788
AMT credit carryforward		2,855			2,855
Allowance for loan losses		4,825			4,853
Unrealized loss on securities available for sale		176			163
Other		1,218			2,562
Total deferred tax assets		19,145			33,271
Deferred tax liabilities
Goodwill and intangible assets		2,233			4,558
Fair value adjustment on junior subordinated debentures		2,792			4,735
Premises and equipment		2,273			3,310
Installment gain on sale of subsidiary		2,230			—
Other		396			1,606
Total deferred tax liabilities		9,924			14,209
Net deferred tax asset before valuation allowance		9,221			19,062
Valuation allowance		(262	)		(237	)
Net deferred tax asset	$	8,959		$	18,825

The Company's federal and state net operating loss carryforwards as of December 31, 2017 were $34,190,000 and $29,178,000, respectively, which will expire at various dates from 2021 through 2035. The Company has a Federal Alternative Minimum Tax Credit carryforward of $2,855,000 as of December 31, 2017 with no expiration. The Company has a valuation allowance on certain net operating loss carryforwards that are not expected to be realized before expiration.

The Company's federal and state net operating loss carryforwards as of December 31, 2016 were $39,055,000 and $34,500,000, respectively. The Company had a Federal Alternative Minimum Tax Credit carryforward of $2,855,000 as of December 31, 2016.

An Internal Revenue Code Section 382 (“Section 382”) ownership change was triggered as part of previous acquisitions. A significant portion of the deferred tax asset relating to the Company's net operating loss and Alternative Minimum Tax credit carryforwards are subject to the annual limitation rules under Section 382 . The utilization of tax carryforward attributes acquired from the EJ Financial Corp. (2010) acquisition is subject to an annual limitation of $341,000. The utilization of tax carryforward attributes acquired from the National Bancshares, Inc.(2013) acquisition is subject to an annual limitation of $2,040,000. Any remaining tax attribute carryforwards generated prior to the Section 382 ownership change in 2013 are subject to an annual limitation of $3,696,000.

The utilization of deferred tax assets related to the net operating loss and tax credit carryforwards acquired from the 2016 ColoEast stock acquisition are subject to an annual limitation of $1,906,000 under Section 382 rules.

At December 31, 2017 and 2016, the Company had no amounts recorded for uncertain tax positions and does not expect any material changes in uncertain tax benefits during the next 12 months. The Company recognizes interest and penalties related to income tax matters in income tax expense.

The Company is subject to U.S. federal income tax as well as income tax in various states. The Company is generally not subject to examination by taxing authorities for years prior to 2014.