UMB FINANCIAL CORP

16. INCOME TAXES

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("the Tax Act”). The Tax Act includes numerous changes to existing tax law, including among other things, a permanent reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The Company recognized the income tax effects of the Tax Act in its 2017 financial statements. The changes included in the Tax Act are broad and complex. Given the complexity of the Tax Act and the detailed analysis required, the adjustments reflected in the current and deferred tax accounts may be subject to further refinement as additional information becomes available and further analysis performed. Upon completion of our 2017 U.S. income tax return in 2018 we may identify additional remeasurement adjustments to our recorded deferred tax liabilities. We will continue to assess our provision for income taxes as further guidance is issued, but do not currently anticipate significant revisions will be necessary.

Income taxes on continuing operations produce effective income tax rates of 22.6 percent in 2017, 22.6 percent in 2016, and 24.7 percent in 2015. These percentages are computed by dividing income tax expense by Income from continuing operations before income taxes.

Income tax expense from continuing operations includes the following components (in thousands):

	Year Ended December 31,
	2017			2016		2015
Current tax
Federal	$	(8,260	)	$	41,860	$	29,622
State		1,889			1,570		2,753
Total current tax (benefit) expense		(6,371	)		43,430		32,375
Deferred tax
Federal		57,851			1,145		301
State		1,890			380		(946	)
Total deferred tax expense (benefit)		59,741			1,525		(645	)
Total tax expense	$	53,370		$	44,955	$	31,730

Income taxes from discontinued operations produce effective income tax rates of 36.6 percent in 2017, 38.6 percent in 2016, and 37.0 percent in 2015. These percentages are computed by dividing income tax expense by Income from discontinued operations before income taxes.

Income tax expense from discontinued operations includes the following components (in thousands):

	Year Ended December 31,
	2017			2016		2015
Current tax
Federal	$	35,169		$	1,759	$	14,847
State		1,930			258		838
Total current tax expense (benefit)		37,099			2,017		15,685
Deferred tax
Federal		260			1,187		(3,998	)
State		(262	)		44		(205	)
Total deferred tax (benefit) expense		(2	)		1,231		(4,203	)
Total tax expense	$	37,097		$	3,248	$	11,482

The reconciliation between the income tax expense and the amount computed by applying the statutory federal tax rate of 35% to income from continuing operations before income taxes is as follows (in thousands):

	Year Ended December 31,
	2017			2016			2015
Statutory federal income tax expense	$	82,721		$	69,506		$	44,901
Tax-exempt interest income		(25,697	)		(20,196	)		(15,405	)
Tax-exempt life insurance related income		(5,769	)		(3,405	)		(932	)
Equity-based compensation		(3,297	)		(1,095	)		—
State and local income taxes, net of federal tax benefits		2,439			1,365			1,399
Federal tax credits, net of amortization of LIHTC⁽¹⁾investments		(1,119	)		(2,480	)		(688	)
Impacts related to the 2017 Tax Act		2,997			—			—
Other		1,095			1,260			2,455
Total tax expense	$	53,370		$	44,955		$	31,730

(1)	Low income housing tax credits

In preparing its tax returns, the Company is required to interpret tax laws and regulations to determine its taxable income. Periodically, the Company is subject to examinations by various taxing authorities that may give rise to differing interpretations of these laws. The Company is not in the examination process with any tax jurisdictions at December 31, 2017. However, upon examination, agreement of tax liabilities between the Company and the multiple tax jurisdictions in which the Company files tax returns may ultimately be different.

Deferred income taxes result from differences between the carrying value of assets and liabilities measured for financial reporting and the tax basis of assets and liabilities for income tax return purposes.

The significant components of deferred tax assets and liabilities are reflected in the following table (in thousands):

	December 31,
	2017			2016
Deferred tax assets:
Net unrealized loss on securities available for sale	$	18,023		$	34,998
Loans, principally due to allowance for loan losses		23,646			40,564
Equity-based compensation		4,975			7,824
Accrued expenses		17,248			37,263
Miscellaneous		3,762			4,587
Total deferred tax assets before valuation allowance		67,654			125,236
Valuation allowance		(3,498	)		(2,860	)
Total deferred tax assets		64,156			122,376
Deferred tax liabilities:
Real Estate Investment Trust dividend		(32,591	)		—
Land, buildings and equipment		(17,783	)		(31,335	)
Original issue discount		(2,580	)		(4,507	)
Partnership investments		(1,005	)		(3,776	)
Trust preferred securities		(7,202	)		(13,780	)
Intangibles		(5,769	)		(3,623	)
Miscellaneous		(3,117	)		(7,148	)
Total deferred tax liabilities		(70,047	)		(64,169	)
Net deferred tax (liability) asset	$	(5,891	)	$	58,207

The Company had various state net operating loss carryforwards of approximately $0.8 million as of December 31, 2017. These net operating losses expire at various times between 2018 and 2037. The Company has a full valuation allowance for these state net operating losses as they are not expected to be realized. In addition, the Company has a valuation allowance of $2.7 million to reduce certain other state deferred tax assets to the amount of tax benefit management believes it will more likely than not realize.

The net deferred tax liability at December 31, 2017 is included in the Accrued expenses and taxes line of the Company’s Consolidated Balance Sheets while the net deferred tax asset at December 31, 2016 is included in the Other assets line of the Company’s Consolidated Balance Sheets. The Company remeasured the deferred tax assets and liabilities at the newly enacted statutory tax rate of 21 percent in accordance with the Tax Act.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years prior to 2014 in the jurisdictions in which it files.

Liabilities Associated With Unrecognized Tax Benefits

The gross amount of unrecognized tax benefits totaled $3.8 million and $4.4 million at December 31, 2017 and 2016, respectively. The total amount of unrecognized tax benefits, net of associated deferred tax benefit, that would impact the effective tax rate, if recognized, would be $3.0 million and $3.5 million at December 31, 2017 and December 31, 2016, respectively. The unrecognized tax benefits relate to state tax positions that have a corresponding federal tax benefit. While it is expected that the amount of unrecognized tax benefits will change in the next twelve months, the Company does not expect this change to have a material adverse impact on the financial condition, results of operations, or cash flows of the Company.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	December 31,
	2017			2016
Unrecognized tax benefits - opening balance	$	4,375		$	4,680
Gross increases - tax positions in prior period		323			—
Gross decreases - tax positions in prior period		—			(269	)
Gross increases - current-period tax positions		228			924
Lapse of statute of limitations		(1,080	)		(960	)
Unrecognized tax benefits - ending balance	$	3,846		$	4,375