INCOME TAXES

The components of income tax expense were as follows:



	For the Years Ended December 31,
	2017		2016			2015
(amounts in thousands)
Current	$	29,924	$	48,472		$	40,004
Deferred	15,118		(2,579		)	(10,092		)
Income tax expense	$	45,042	$	45,893		$	29,912

Effective tax rates differ from the federal statutory rate of 35%, which is applied to income before income tax expense, due to the following:



	For the Years Ended December 31,
	2017					2016					2015
	Amount			% of pretax income		Amount			% of pretax income		Amount			% of pretax income
(amounts in thousands)
Federal income tax at statutory rate	$	43,357		35.00	%	$	43,608		35.00	%	$	30,973		35.00	%
State income tax, net of federal benefit	3,835			3.10		4,548			3.65		1,434			1.62
Tax-exempt interest, net of disallowance	(381		)	(0.31	)	(237		)	(0.19	)	(277		)	(0.31	)
Bank-owned life insurance	(2,675		)	(2.16	)	(1,716		)	(1.38	)	(2,422		)	(2.73	)
Equity-based compensation benefit	(10,741		)	(8.67	)	(3,659		)	(2.94	)	—			—
Non-deductible executive compensation	654			0.53		—			—		—			—
Unrecorded basis difference in foreign subsidiaries	4,527			3.65		2,830			2.27		—			—
Enactment of federal tax reform	5,505			4.44		—			—		—			—
Other	961			0.78		519			0.42		204			0.22
Effective income tax rate	$	45,042		36.36	%	$	45,893		36.83	%	$	29,912		33.80	%

Customers accounts for income taxes under the liability method of accounting for income taxes. The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. Customers determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

A tax position is recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation process, if any. A tax position that meets the more likely than not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more likely than not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.

At December 31, 2017 and 2016, Customers had no ASC 740-10 unrecognized tax benefits. Customers does not expect the total amount of unrecognized tax benefits to significantly increase within the next 12 months. Customers recognizes interest and penalties on unrecognized tax benefits in other expense.

Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the carry-back period. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income and the projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Based on its assessment, management determined that no valuation allowance was necessary at December 31, 2017 and 2016.

On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act, was signed into law. The Act includes many provisions that will effect Customers' income tax expenses, including reducing the corporate federal tax rate from 35% to 21% effective January 1, 2018. As a result of the rate reduction, Customers was required to re-measure, through income tax expense in the period of enactment, its deferred tax assets and liabilities using the enacted rate at which Customers expects them to be recovered or settled. The re-measurement of the net deferred tax asset resulted in additional income tax expense of $5.5 million.

Also on December 22, 2017, the SEC released Staff Accounting Bulletin No. 118 to address any uncertainty or diversity of views in practice in accounting for the income tax effects of the Act in situations where a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete this accounting in the reporting period that includes the enactment date. SAB 118 allows for a measurement period not to extend beyond one year from the Act’s enactment date to complete the necessary accounting.

Customers recorded provisional amounts of deferred income taxes using reasonable estimates in three areas where information necessary to complete the accounting was not available, prepared or analyzed as follows: (i) the deferred tax liability for temporary differences between the tax and financial reporting bases of fixed assets principally due to the accelerated depreciation under the Act which allows for full expensing of qualified property purchased and placed in service after September 27, 2017; (ii) the deferred tax asset for temporary differences associated with accrued compensation is awaiting final determinations of amounts that will be paid and deducted on the 2017 income tax returns and (iii) the deferred tax liability for temporary differences associated with equity investments in partnerships is awaiting receipt of Schedules K-1 from outside preparers, which is necessary to determine the 2017 tax impact from these investments.

In a fourth area, Customers made no adjustments to deferred tax assets representing future deductions for accrued compensation that may be subject to new limitations under Internal Revenue Code Section 162(m) which, generally, limits the annual deduction for certain compensation paid to certain team members to $1 million. There is uncertainty in applying the newly enacted rules to existing contracts, and Customers is seeking further clarifications before completing its analysis.

Customers will complete and record the income tax effects of these provisional items during the period in which the necessary information becomes available. This measurement period will not extend beyond December 22, 2018.

Deferred income taxes reflect temporary differences in the recognition of revenue and expenses for tax reporting and financial statement purposes, principally because certain items are recognized in different periods for financial reporting and tax return purposes. The following represents Customers' deferred tax asset and liabilities as December 31, 2017 and 2016:



	December 31,
	2017			2016
(amounts in thousands)
Deferred tax assets
Allowance for loan losses	$	9,738		$	14,540
Net unrealized losses on securities	512			1,714
OREO expenses	748			1,233
Non-accrual interest	515			589
Net operating losses	1,199			2,137
Deferred compensation	1,181			1,523
Equity-based compensation	2,748			5,548
Cash flow hedge	84			1,413
Incentive compensation	634			3,041
Net deferred loan fees	47			—
Other	2,215			1,972
Total deferred tax assets	19,621			33,710
Deferred tax liabilities
Fair value adjustments on acquisitions	(618		)	(1,039		)
Net deferred loan fees	—			(1,090		)
Bank premises and equipment	(986		)	(713		)
Lease adjustments	(4,899		)	(206		)
Other	(980		)	(1,173		)
Total deferred tax liabilities	(7,483		)	(4,221		)
Net deferred tax asset	$	12,138		$	29,489

Customers had approximately $6.0 million of federal and state net operating loss carryovers at December 31, 2017, that expire in 2027 through 2037.

Customers is subject to U.S. federal income tax as well as income tax in various state and local taxing jurisdictions. Generally, Customers is no longer subject to examination by federal, state and local taxing authorities for years prior to December 31, 2014.