Atlantic Union Bankshares Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Dec. 31, 2018

The Company files income tax returns in the U.S., the Commonwealth of Virginia, and other states. With few exceptions, the Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years prior to 2015.

On December 22, 2017, the Tax Act was signed into law. The Company applied the guidance in SAB 118 when accounting for the enactment-date effects of the Tax Act in 2017 and throughout 2018. Among other things, the Tax Act permanently reduced the corporate tax rate to 21% from the prior maximum rate of 35%, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate tax rate to 21%, companies were required to revalue their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the fourth quarter of 2017. During 2017, the Company recorded $6.1 million in additional tax expense based on the Company's analysis of the impact of the Tax Act. As of December 31, 2018, the Company had to complete our accounting for all of the enactment-date income tax effects of the Tax Act. No additional adjustments related the Tax Act were recorded in 2018.

Net deferred tax assets and liabilities consist of the following components as of December 31, 2018 and 2017 (dollars in thousands):



	2018		2017
Deferred tax assets:
Allowance for loan losses	$	19,369	$	7,963
Benefit plans	3,925		2,511
Acquisition accounting	11,788		4,911
Stock grants	894		328
OREO	2,515		1,673
Securities available for sale	1,577		—
Prime loan swap	981		1,640
Investments in pass through entities	915		646
Net operating losses	66,037		3,624
Nonaccrual loans	3,990		—
Other	2,722		1,268
Total deferred tax assets	$	114,713	$	24,564
Deferred tax liabilities:
Acquisition accounting	$	13,053	$	5,923
Premises and equipment	3,877		3,600
Securities available for sale	25		1,479
Other	583		529
Total deferred tax liabilities	17,538		11,531
Net deferred tax asset	$	97,175	$	13,033

At December 31, 2018, the Company had federal net operating loss carryforwards of approximately $272.3 million, of which approximately $252.4 million under pre-2018 law can be carried forward 20 years, and $19.9 million that can be carried forward indefinitely. The Company also had state net operating loss carryforwards of approximately $267.3 million which will begin to expire after 2026. In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of temporary differences, projected future taxable income, and tax planning strategies in accordance with ASC 740-10-30. Based on its latest analysis, at December 31, 2018, management concluded that it is more likely than not that the Company would be able to fully realize its deferred tax asset related to net operating losses generated at the federal and state level. A significant portion of the net operating losses were obtained in the acquisition of Xenith at the beginning of 2018.

The Bank is not subject to a state income tax in its primary place of business (Virginia). The Company’s other subsidiaries are subject to state income taxes and have generated losses for state income tax purposes.

The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions in accordance with applicable ASC 740, Accounting for Uncertainty in Income Taxes, regulations.

The provision for income taxes charged to continuing operations for the years ended December 31, 2018, 2017, and 2016 consists of the following (dollars in thousands):



	2018		2017		2016
Current tax expense	$	12,114	$	27,255	$	25,578
Deferred tax expense (benefit) ⁽¹⁾	17,902		5,535		366
Income tax expense	$	30,016	$	32,790	$	25,944

(1) The deferred tax expense for the year ended December 31, 2017 includes the impact of the Tax Act.

The income tax expense differs from the amount of income tax determined by applying the U.S. federal income tax rate to pre-tax income for the years ended December 31, 2018, 2017, and 2016, due to the following (dollars in thousands):



	2018			2017			2016
Computed "expected" tax expense	$	37,680		$	36,738		$	35,645
(Decrease) in taxes resulting from:
Tax-exempt interest income, net	(5,188		)	(6,112		)	(6,087		)
Valuation allowance adjustment	—			(2,982		)	—
Impact of the Tax Act	—			6,105			—
Other, net	(2,476		)	(959		)	(3,614		)
Income tax expense	$	30,016		$	32,790		$	25,944

The effective tax rates were 16.7%, 31.2%, and 25.5% for years ended December 31, 2018, 2017, and 2016, respectively. Tax credits totaled approximately $1.1 million, $858,000, and $2.0 million for the years ended December 31, 2018, 2017, and 2016, respectively. The changes in the effective tax rates for 2018 and 2017 were primarily related to the impact of the Tax Act.