CASH 2018 Annual Report

150 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.