INCOME TAXES

The Company and its subsidiaries file a consolidated federal income tax return on a fiscal year basis. The provision for income taxes for the years presented below consisted of the following:



Years ended September 30,	2018			2017			2016
	(Dollars in Thousands)
Federal:
Current	$	(4,023	)	$	12,153		$	4,410
Deferred	5,895			(5,040		)	(440		)
	1,872			7,113			3,970

State:
Current	2,611			4,366			1,422
Deferred	634			(1,246		)	210
	3,245			3,120			1,632

Income tax expense	$	5,117		$	10,233		$	5,602

The tax effects of the Company's temporary differences that give rise to significant portions of its deferred tax assets and liabilities at September 30, 2018 and 2017 were:



September 30,	2018			2017
	(Dollars in Thousands)
Deferred tax assets:
Bad debts	$	3,224		$	2,832
Deferred compensation	3,495			1,548
Stock based compensation	3,758			3,436
AMT Credit	—			1,869
Intangibles	—			5,235
Net unrealized losses on securities available for sale	10,663			—
Valuation adjustments	6,991			—
General business credits ⁽¹⁾	12,243			—
Accrued expenses	3,144			1,188
Other assets	1,629			1,579
	45,147			17,687

Deferred tax liabilities:
Premises and equipment	(347		)	(1,713		)
Intangibles	(4,231		)	—
Net unrealized gains on securities available for sale	—			(4,934		)
Deferred income	(2,070		)	—
Leased assets	(17,985		)	—
Other liabilities	(1,777		)	(1,939		)
	(26,410		)	(8,586		)

Net deferred tax assets	$	18,737		$	9,101

⁽¹⁾The general business credits are investment tax credits generated from qualified solar energy property placed in service during the year ended September 30, 2018 or in previous periods by Crestmark prior to acquisition. These credits expire on September 30, 2037.

The table below reconciles the statutory federal income tax expense and rate to the effective income tax expense and rate for the years presented. The Company's effective tax rate is calculated by dividing income tax expense by income before income tax expense.



Years ended September 30,	2018					2017					2016
(Dollars in Thousands)	Amount			Rate		Amount			Rate		Amount			Rate

Statutory federal income tax expense and rate	$	14,082		24.5	%	$	19,303		35.0	%	$	13,588		35.0	%
Change in tax rate resulting from:
State income taxes net of federal benefits	2,461			4.3	%	2,014			3.7	%	933			2.4	%
Tax exempt income	(6,968		)	(12.1	)%	(9,991		)	(18.1	)%	(8,257		)	(21.3	)%
Nondeductible acquisition costs	1,295			2.3	%	—			—	%	—			—	%
General business credits	(3,948		)	(6.9	)%	—			—	%	—			—	%
Tax Reform	3,849			6.7	%	—			—	%	—			—	%
Amended Crestmark Bancorp historical tax return	(4,644		)	(8.1	)%	—			—	%	—			—	%
Other, net	(1,010		)	(1.7	)%	(1,093		)	(2.0	)%	(662		)	(1.7	)%
Total income tax expense	$	5,117		9.0	%	$	10,233		18.6	%	$	5,602		14.4	%

As of September 30, 2018, the Company had a gross deferred tax asset of $2.0 million for separate company state cumulative net operating loss carryforwards, for which $1.6 million was reserved. At September 30, 2017, the Company had a gross deferred tax asset of $1.3 million for separate company state cumulative net operating loss carryforwards, which was fully reserved for.

In general, management believes that the realization of its deferred tax assets is more likely than not based on the expectations as to future taxable income; therefore, there was no deferred tax valuation allowance at September 30, 2018, or 2017 with the exception of the state cumulative net operating loss carryforwards discussed above.

Federal income tax laws provided savings banks with additional bad debt deductions through September 30, 1987, totaling $6.7 million for the Bank. Accounting standards do not require a deferred tax liability to be recorded on this amount, which liability otherwise would total approximately $1.4 million at September 30, 2018 and 2017. If the Bank were to be liquidated or otherwise cease to be a bank, or if tax laws were to change, the $1.4 million would be recorded as expense.

The Tax Act was signed into law on December 22, 2017. In addition to implementing numerous other changes to the U.S. tax regime, the Tax Act lowers the U.S. corporate tax rate from 35% to 21% effective for taxable years beginning on or after January 1, 2018. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.

As a result of the Tax Act, the Company remeasured its deferred tax assets and deferred tax liabilities during its fiscal 2018 first quarter, resulting in additional income tax expense of $3.6 million. As the Company’s fiscal year end ends on September 30, the statutory corporate rate for fiscal 2018 was prorated to 24.5%.

The provisions of ASC 740, Income Taxes, address the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the Consolidated Financial Statements. Under ASC 740, the Company recognizes the tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination, with a tax examination being presumed to occur, including the resolution of any related appeals or litigation. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured as the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.

The Company uses the flow through method of accounting for investment tax credits under which the credits are recognized as a reduction to income tax expense in the period in which the credit arises. During the fiscal year ended September 30, 2018, $4.0 million in investment tax credits were recognized as a reduction to income tax expense. During the fiscal years ended September 30, 2017 and 2016, no investment tax credits were recognized.

The Company’s tax reserves reflect management’s judgment as to the resolution of the issues involved if subject to judicial review. While the Company believes that its reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed its related reserve. With respect to these reserves, the Company’s income tax expense would include (i) any changes in tax reserves arising from material changes during the period in the facts and circumstances surrounding a tax issue, and (ii) any difference from the Company’s tax position as recorded in the Consolidated Financial Statements and the final resolution of a tax issue during the period.

The tax years ended September 30, 2015 and later remain subject to examination by the Internal Revenue Service. For state purposes, the tax years ended September 30, 2015 and later remain open for examination, with few exceptions.

A reconciliation of the beginning and ending balances for liabilities associated with unrecognized tax benefits for the years ended September 30, 2018, and 2017 follows:



September 30,	2018			2017
	(Dollars in Thousands)
Balance at beginning of year	$	645		$	525
Additions for tax positions related to the current year	—			192
Additions for tax positions related to the prior years	—			31
Reductions for tax positions related to prior years	(211		)	(103		)
Balance at end of year	$	434		$	645

The total amount of unrecognized tax benefits that, if recognized, would impact the effective rate was $384,000 as of September 30, 2018. The Company recognizes interest related to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest related to unrecognized tax benefits was $68,000 as of September 30, 2018. The Company does not anticipate any significant change in the total amount of unrecognized tax benefits within the next 12 months.