INCOME TAXES

The components of income tax expense were as follows:



	For the Years Ended December 31,
	2018		2017		2016
(amounts in thousands)
Current	$	10,056	$	29,924	$	48,472
Deferred	9,303		15,118		(2,579		)
Income tax expense	$	19,359	$	45,042	$	45,893

Effective tax rates differ from the federal statutory rate of 21% at December 31, 2018, and at 35% at December 31, 2017 and 2016, which was applied to income before income tax expense, due to the following:



	For the Years Ended December 31,
	2018					2017					2016
	Amount			% of pretax income		Amount			% of pretax income		Amount			% of pretax income
(amounts in thousands)
Federal income tax at statutory rate	$	19,121		21.00	%	$	43,357		35.00	%	$	43,608		35.00	%
State income tax, net of federal benefit	4,067			4.47		3,835			3.10		4,548			3.65
Tax-exempt interest, net of disallowance	(360		)	(0.40	)	(381		)	(0.31	)	(237		)	(0.19	)
Bank-owned life insurance	(1,547		)	(1.70	)	(2,675		)	(2.16	)	(1,716		)	(1.38	)
Equity-based compensation	(547		)	(0.60	)	(10,741		)	(8.67	)	(3,659		)	(2.94	)
Non-deductible executive compensation	230			0.25		654			0.53		—			—
Unrecorded basis difference in foreign subsidiaries	343			0.38		4,527			3.65		2,830			2.27
Enactment of federal tax reform	(21		)	(0.02	)	5,505			4.44		—			—
Other	(1,927		)	(2.12	)	961			0.78		519			0.42
Effective income tax rate	$	19,359		21.26	%	$	45,042		36.36	%	$	45,893		36.83	%

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, 2018 and 2017, 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 twelve 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, 2018 and 2017.

On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act, was signed into law. The Tax Act includes many provisions that affected Customers' income tax expenses, including reducing its 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 expected 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 during fourth quarter 2017.

Also on December 22, 2017, the SEC released SAB 118 to address any uncertainty or diversity of views in practice in accounting for the income tax effects of the Tax 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 allowed for a measurement period not to extend beyond one year from the Tax 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 Tax Act which allowed 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 was awaiting final determinations of amounts that were paid and deducted on the 2017 income tax returns and (iii) the deferred tax liability for temporary differences associated with equity investments in partnerships were awaiting receipt of Schedules K-1 from outside preparers, which was 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 were 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 was uncertainty in applying the newly enacted rules to existing contracts, and Customers was seeking further clarifications before completing its analysis.

Customers completed the calculations for the provisional items with the completion of the 2017 tax returns and completed the analysis of the Section 162(m) rules after further guidance was issued. The impact of the completed calculations to the re-measurement of the deferred taxes resulted in an immaterial change and the analysis of the 162(m) rules resulted in no adjustment.

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, 2018 and 2017:



	December 31,
	2018			2017
(amounts in thousands)
Deferred tax assets
Allowance for loan losses	$	10,449		$	9,738
Net unrealized losses on securities	7,639			512
OREO write-downs	91			748
Non-accrual interest	539			515
Net operating losses	1,212			1,199
Deferred compensation	1,129			1,181
Equity-based compensation	4,049			2,748
Cash flow hedge	324			84
Incentive compensation	1,056			634
Net deferred loan fees	671			47
Other	3,028			2,215
Total deferred tax assets	30,187			19,621
Deferred tax liabilities
Fair value adjustments on acquisitions	(569		)	(618		)
Bank premises and equipment	(884		)	(986		)
Lease adjustments	(17,786		)	(4,899		)
Other	(746		)	(980		)
Total deferred tax liabilities	(19,985		)	(7,483		)
Net deferred tax asset	$	10,202		$	12,138

Customers had approximately $5.2 million of federal and state net operating loss carryovers subject to the annual limitation under Internal Revenue code Section 382 at December 31, 2018, that begin to expire in 2027. Customers also has state net operating loss carryovers for some states that begin to expire in 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 the year ended December 31, 2015.