CAPSTAR FINANCIAL HOLDINGS, INC.

NOTE 10 – INCOME TAXES

The components of income tax expense are summarized as follows (in thousands):

	2017		2016			2015
Current:
Federal	$	214	$	4,029		$	2,794
State		36		759			168
		250		4,788			2,962
Deferred:
Federal		4,218		(395	)		314
State		167		100			194
		4,385		(295	)		508
Total	$	4,635	$	4,493		$	3,470

A reconciliation of actual income tax expense in the financial statements to the “expected” tax expense (computed by applying the statutory federal income tax rate of 34% to income before income taxes) for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):

	2017			2016			2015
Computed "expected" tax expense	$	2,086		$	4,621		$	3,750
State income taxes, net of effect of federal income taxes		134			567			239
Tax-exempt interest income		(418	)		(394	)		(367	)
Earnings on bank owned life insurance contracts		(197	)		(204	)		(213	)
Disallowed expenses		86			60			71
Excess tax benefits related to stock compensation		(632	)		—			—
Write-down of deferred tax assets due to tax reform		3,562			—			—
Other		14			(157	)		(10	)
Total	$	4,635		$	4,493		$	3,470

As a result of the Tax Cuts and Jobs Act of 2017 that was signed into law December 2017, the Company revalued its net deferred tax asset position. This revaluation resulted in a $3.6 million decrease in net deferred tax assets and a corresponding increase to income tax expense for the year ended December 31, 2017.

Significant items that gave rise to deferred taxes at December 31, 2017, 2016 and 2015 were as follows (in thousands):

	December 31, 2017		December 31, 2016		December 31, 2015
Deferred tax assets:
Allowance for loan losses	$	3,227	$	4,320	$	3,787
Depreciation		—		326		341
Net operating loss carryforward		843		1,548		1,705
Organization and preopening costs		557		987		1,142
Stock-based compensation		672		1,071		941
Acquired loans		124		224		401
Acquired deposits		22		60		109
Nonaccrual interest		25		39		60
Write-downs of other real estate		—		—		171
Accrued incentive compensation		—		688		694
Reserve for contingencies		496		1,061		462
Accrued contributions		169		197		140
Unrealized loss on securities available-for-sale		193		1,493		995
Unrealized loss on securities held-to-maturity		4		752		816
Cash flow hedge		359		588		1,209
Accrued vacation		45		54		53
Other		134		51		75
Deferred tax assets		6,870		13,459		13,101
Deferred tax liabilities:
Prepaid expenses		134		133		—
Depreciation		39		—		—
Goodwill		138		343		204
Amortization of core deposit intangible		6		27		47
Deferred tax liabilities		317		503		251
Net deferred tax asset	$	6,553	$	12,956	$	12,850

At December 31, 2017, the Company had federal net operating loss carryforwards of approximately $4,013,000, which expire at various dates from 2030 to 2032. Deferred tax assets are fully recognized because the benefits are more likely than not to be realized based on management’s estimation of future taxable earnings.

There were no significant unrecognized income tax benefits as of December 31, 2017, 2016 or 2015. As of December 31, 2017, 2016 and 2015 the Company had no accrued interest or penalties related to uncertain tax positions.