INCOME TAXES

12 Months Ended

Dec. 31, 2019

20. INCOME TAXES

Components of income tax expense (benefit) for the years ended December 31, 2019, 2018 and 2017 were as follows:



	Year Ended December 31,
	2019			2018		2017
	(Dollars in thousands)
Current expense:
Federal	$	23,359		$	10,812	$	2,471
State	211			72		(81		)
Total current	23,570			10,884		2,390
Deferred expense:
Federal	(8,970		)	2,137		27,263
State	5,005			5,737		4,943
Total deferred	(3,965		)	7,874		32,206
Provision for income taxes	$	19,605		$	18,758	$	34,596

On December 22, 2017, H.R.1, commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform”) was signed into law making significant changes to the U.S. federal tax code. The most impactful, as related to the Company, included a decrease in the current U.S. federal corporate tax rate from 35% to 21% for the year beginning January 1, 2018. In the year ended December 31, 2017, the Company recorded additional income tax expense of $7.4 million related to the estimated impact of Tax Reform on the Company's net deferred tax assets ("DTA"). In 2018, the Company recorded an income tax benefit of $1.5 million related to the finalization of the impact of Tax Reform, which also included the impact of a tax method change for software development and prepaid expenses that was filed in 2018.

Income tax expense (benefit) for the periods presented differed from the "expected" tax expense (computed by applying the U.S. federal corporate tax rate of 21% for the years ended December 31, 2019 and December 31, 2018 and 35% for the year ended December 31, 2017, to income (loss) before income taxes) for the following reasons:



	Year Ended December 31,
	2019			2018			2017
	(Dollars in thousands)
Computed "expected" tax expense (benefit)	$	16,365		$	16,430		$	26,270
Increase (decrease) in taxes resulting from:
Tax-exempt interest income	(675		)	(808		)	(1,387		)
Other tax-exempt income	(652		)	(445		)	(1,186		)
Low-income housing and energy tax credits	(182		)	35			(594		)
State income taxes, net of Federal income tax effect, excluding impact of deferred tax valuation allowance	4,345			4,756			3,348
Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets allocated to income tax expense	(41		)	140			570
Impact of Tax Reform on net deferred tax assets	—			(1,542		)	7,440
Other, net	445			192			135
Total	$	19,605		$	18,758		$	34,596

See Note 1 - Summary of Significant Accounting Policies for discussion of the accounting policy change in 2018 from the cost method to the proportional amortization method for our LIHTC investments, the effects of which are now reported on the income tax expense line in the consolidated statements of income and are included in the low-income housing and energy tax credits line above.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:



	December 31,
	2019		2018
	(Dollars in thousands)
Deferred tax assets
Lease liability	$	14,095	$	—
Allowance for loan and lease losses	10,136		10,112
Accrued expenses	1,795		1,517
Employee retirement benefits	2,847		2,595
Federal and state tax credit carryforwards	1,821		7,728
State net operating loss carryforwards	3,181		3,291
Restricted stock and non-qualified stock options	954		1,001
Premises and equipment	3,365		3,157
Other	2,488		3,485
Total deferred tax assets	40,682		32,886

Deferred tax liabilities
Right-of-use lease asset	14,019		—
Intangible assets	3,941		4,189
Other	2,761		3,698
Total deferred tax liabilities	20,721		7,887

Less: Deferred tax valuation allowance	3,420		3,461

Net deferred tax assets	$	16,541	$	21,538

In assessing the realizability of our net DTA, management considers whether it is more likely than not that some portion or all of the DTA will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax-planning strategies in making this assessment.

As of December 31, 2019, the valuation allowance on our net DTA totaled $3.4 million, of which $3.2 million related to our DTA from net apportioned net operating loss ("NOL") carryforwards for California state income tax purposes as we do not expect to generate sufficient income in California to utilize the DTA. The remaining $0.2 million relates to a valuation allowance on a Hawaii capital loss carry forward balance of $6.2 million that we do not expect to be able to utilize. The net change in the valuation allowance was a decrease of $41 thousand in 2019, compared to an increase of $0.1 million in 2018.

Net of this valuation allowance, the Company's net DTA totaled $16.5 million as of December 31, 2019, compared to a net DTA of $21.5 million as of December 31, 2018.

At December 31, 2019, the Company had NOL carryforwards for California state income tax purposes of $37.1 million, which are available to offset future state taxable income. California NOL carryforwards will expire if not utilized beginning in 2028. The Company does not have any NOL carryforwards for U.S. federal or Hawaii state income tax purposes. In addition, we have gross Hawaii state tax credit carryforwards of $2.5 million that do not expire. In 2018, we utilized the remainder of our federal tax credit carryforwards.

At December 31, 2019, we have no material unrecognized tax benefits that, if recognized would favorably affect the effective income tax rate in future periods. We do not expect our unrecognized tax benefits to change significantly over the next 12 months.

We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Taxable years through 2015 are closed.