Income Taxes
The Tax Cut and Jobs Act (the "Tax Act") enacted in December 2017 reduced the federal corporate income tax rate from 35% to 21% effective January 1, 2018. As a result of the Tax Act, we recorded a $17.6 million write-off of our net deferred tax asset, which was recorded as additional income tax expense during 2017.
We reported gross deferred tax assets of $63.0 million and $89.7 million at December 31, 2017 and 2016, respectively, which related primarily to our allowance for loan losses, loan origination fees and stock compensation. Management believes it is more likely than not that all of the deferred tax assets will be realized. Our net deferred tax assets are included in other assets in the consolidated balance sheets.
Income tax expense/(benefit) consists of the following for the years ended (in thousands): |
| | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 94,112 |
| | $ | 86,612 |
| | $ | 80,957 |
|
State | 3,257 |
| | 2,412 |
| | 2,245 |
|
Total | 97,369 |
| | 89,024 |
| | 83,202 |
|
Deferred | | | | | |
Federal | 31,276 |
| | (2,946 | ) | | (3,561 | ) |
State | — |
| | — |
| | — |
|
Total | 31,276 |
| | (2,946 | ) | | (3,561 | ) |
Total expense | | | | | |
Federal | 125,388 |
| | 83,666 |
| | 77,396 |
|
State | 3,257 |
| | 2,412 |
| | 2,245 |
|
Total | $ | 128,645 |
| | $ | 86,078 |
| | $ | 79,641 |
|
The tax effect of unrealized gains and losses on available-for-sale securities is recorded to other comprehensive income and is not a component of income tax expense/(benefit).
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The table below summarizes significant components of our deferred tax assets and liabilities utilizing federal corporate income tax rates of 21% as of December 31, 2017 and 35% as of December 31, 2016 (in thousands): |
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Allowance for credit losses | $ | 42,213 |
| | $ | 64,009 |
|
Loan origination fees | 10,084 |
| | 13,536 |
|
Stock compensation | 4,460 |
| | 5,761 |
|
Non-accrual interest | 1,680 |
| | 2,537 |
|
Deferred lease expense | 911 |
| | 1,519 |
|
Other | 3,686 |
| | 2,322 |
|
Total deferred tax assets | 63,034 |
| | 89,684 |
|
Deferred tax liabilities: | | | |
Loan origination costs | (1,304 | ) | | (1,722 | ) |
Leases | (6,850 | ) | | (7,962 | ) |
MSRs | (17,619 | ) | | (10,973 | ) |
Depreciation | (7,354 | ) | | (6,941 | ) |
Unrealized gain on securities | (138 | ) | | (223 | ) |
Other | (2,068 | ) | | (2,971 | ) |
Total deferred tax liabilities | (35,333 | ) | | (30,792 | ) |
Net deferred tax asset | $ | 27,701 |
| | $ | 58,892 |
|
We remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of our deferred tax asset was $17.6 million.
ASC 740-10, Income Taxes — Accounting for Uncertainties in Income Taxes (“ASC 740-10”) prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of cumulative benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC 740-10 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.
We file income tax returns in the U.S. federal jurisdiction and several U.S. state jurisdictions. We are no longer subject to U.S. federal income tax examinations for years before 2014.
The reconciliation of our effective income tax rate to the U.S. federal statutory tax rate is as follows:
|
| | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 | | 2015 |
U.S. statutory rate | 35 | % | | 35 | % | | 35 | % |
State taxes | 1 | % | | 1 | % | | 1 | % |
Non-deductible expenses | 1 | % | | 1 | % | | 1 | % |
Deferred tax asset write-off | 5 | % | | — | % | | — | % |
Non-taxable income | (1 | )% | | (1 | )% | | (1 | )% |
Other | (1 | )% | | — | % | | (1 | )% |
Effective tax rate | 40 | % | | 36 | % | | 35 | % |