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Income Taxes

12 Months Ended

Dec. 31, 2019

Note 11—Income Taxes

The provision for income taxes consists of the following:


	Year Ended December 31,
(Dollars in thousands)	2019		2018		2017
Current:
Federal	$	40,375	$	25,275	$	46,153
State		4,965		6,783		3,018
Total current tax expense		45,340		32,058		49,171
Deferred:
Federal		(1,598)		12,557		31,971
State		200		769		109
Total deferred tax expense		(1,398)		13,326		32,080
Provision for income taxes	$	43,942	$	45,384	$	81,251

The provision for income taxes differs from that computed by applying the federal statutory income tax rate of 21% in 2018 and 2019 and 35% in prior years, to income before provision for income taxes, as indicated in the following analysis:


	Year Ended December 31,
(Dollars in thousands)	2019		2018		2017
Income taxes at federal statutory rate	$	48,389	$	47,094	$	59,082
Increase (reduction) of taxes resulting from:
State income taxes, net of federal tax benefit		4,080		5,916		2,032
Non-deductible merger expenses		—		—		586
Increase in cash surrender value of BOLI policies		(1,210)		(1,261)		(1,319)
Tax-exempt interest		(1,877)		(2,037)		(2,840)
Income tax credits		(6,881)		(3,118)		(1,951)
Dividends received deduction		(2)		(5)		(12)
Non-deductible FDIC premiums		133		191		—
Revaluation of net deferred tax asset due to tax law change		—		(991)		26,558
Other, net		1,310		(405)		(885)
	$	43,942	$	45,384	$	81,251

On December 22, 2017, the President signed into law the Tax Reform Act which, among other things, lowered the maximum corporate tax rate from 35% to 21% beginning in 2018. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates

are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. As a result of the Tax Reform Act, the Company revalued its deferred tax assets and liabilities through the provision for income taxes.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company recognized a provisional tax impact of $26.6 million as additional income tax expense related to the revaluation of deferred tax assets and liabilities and included that amount in its consolidated financial statements for the year ended December 31, 2017. In addition to that, during 2018, the Company finalized its calculation for the revaluation of deferred tax assets and liabilities and recorded that impact in its consolidated financial statements for the year ended December 31, 2018.

The components of the net deferred tax asset are as follows:


	December 31,
(Dollars in thousands)	2019		2018
Allowance for loan losses	$	14,468	$	12,953
Other-than-temporary impairment on securities		250		257
Share-based compensation		4,975		4,475
Pension plan and post-retirement benefits		494		192
Deferred compensation		12,475		11,841
Purchase accounting adjustments		24,530		28,659
Other real estate owned		380		455
Net operating loss and tax credit carryforwards		10,347		11,572
Lease liability		19,146		—
Cash flow hedge		3,034		11
Unrealized losses on investment securities available for sale		—		7,273
Other		1,040		1,665
Total deferred tax assets		91,139		79,353
Unrealized gains on investment securities available for sale		2,373		—
Depreciation		6,585		7,314
Intangible assets		9,979		12,617
Net deferred loan costs		9,082		9,409
Right of use assets		19,465		—
Prepaid expense		474		474
Tax deductible goodwill		810		388
Mortgage servicing rights		6,688		7,608
Other		480		840
Total deferred tax liabilities		55,936		38,650
Net deferred tax assets before valuation allowance		35,203		40,703
Less, valuation allowance		(3,887)		(3,575)
Net deferred tax assets	$	31,316	$	37,128

The Company had federal net operating loss (“NOL”) carryforwards of $18.7 million and $24.3 million for the years ended December 31, 2019 and 2018, respectively, which expire in varying amounts through 2032. As a result of the Peoples, Savannah and Park Sterling ownership changes in 2012 and 2017, Section 382 of the Internal Revenue Code places an annual limitation of the amount of federal net operating loss carryforwards which the Company may utilize. Additionally, section 382 limits the Company’s ability to utilize certain tax deductions (realized built-in losses or “RBIL”) due to the existence of a Net Unrealized Built-in Loss (“NUBIL”) at the time of the change in control. The Company is allowed to carry forward any such RBIL under terms similar to those related to NOLs. Consequently, $4.6 million of the Company’s NOL carryforwards attributed to the Peoples acquisition are subject to annual limitations of $1.5 million, and $13.0 million of the Company’s NOL carryforwards attributed to the Savannah acquisition are subject to annual limitation of $2.0 million, and $1.1 million of the Company’s NOL carryforwards attributed to the Park Sterling acquisition are subject to annual limitations of $218 thousand. Additionally, the Company’s RBIL carryforwards attributed to the Park Sterling acquisition totaling $12.8 million are subject to annual limitations of $1.1 million. The Company expects all section 382 limited carryforwards to be realized within the applicable carryforward period.

The Company had state net operating loss carryforwards of $108.6 million and $101.4 million for the years ended December 31, 2019 and 2018, respectively, which expire in varying amounts through 2037. There is a valuation allowance of $3.9 million that relates to the parent company’s state operating loss carryforwards for which realizability is uncertain. The change in the valuation allowance for the years ended December 31, 2019, 2018, and 2017 was immaterial.

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. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deferred tax assets, net of the valuation allowance at December 31, 2019.

As of December 31, 2019, the Company had no material unrecognized tax benefits or accrued interest and penalties. It is the Company’s policy to account for interest and penalties accrued relative to unrecognized tax benefits as a component of income tax expense.

Generally, the Company’s federal and state income tax returns are no longer subject to examination by taxing authorities for years prior to 2016.