INCOME TAXES
Provision for Income Taxes
The components of the Company’s provision for income taxes for the years ended December 31, 2017, 2016, and 2015 were, as follows:
|
| | | | | | | | | | | | |
(In thousands) | | 2017 | | 2016 | | 2015 |
Current: | | |
| | |
| | |
|
Federal tax expense | | $ | 11,686 |
| | $ | 6,758 |
| | $ | 4,696 |
|
State tax expense | | 1,112 |
| | 1,101 |
| | (1,631 | ) |
Total current expense | | 12,798 |
| | 7,859 |
| | 3,065 |
|
Deferred: | | |
| | |
| | |
|
Federal tax expense | | 29,824 |
| | 9,438 |
| | 2,023 |
|
State tax expense | | 1,805 |
| | 1,591 |
| | (24 | ) |
Total deferred tax expense (1) | | 31,629 |
| | 11,029 |
| | 1,999 |
|
Change in valuation allowance | | 75 |
| | (104 | ) | | — |
|
Total income tax expense | | $ | 44,502 |
| | $ | 18,784 |
| | $ | 5,064 |
|
| |
(1) | 2017 Deferred tax expense of $31.6 million includes an $18.1 million charge to re-measure the net deferred tax asset at December 31, 2017 pursuant to the reduction in the corporate income tax rate from 35% to 21%, effective January 1, 2018, per the Tax Cuts and Jobs Act enacted on December 22, 2017. |
Effective Tax Rate
The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended December 31, 2017, 2016, and 2015:
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| | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
(In thousands, except rates) | | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
Statutory tax rate | | $ | 34,912 |
| | 35.0 | % | | $ | 27,108 |
| | 35.0 | % | | $ | 19,104 |
| | 35.0 | % |
Increase (decrease) resulting from: | | |
| | |
| | |
| | |
| | |
| | |
|
State taxes, net of federal tax benefit | | 2,232 |
| | 2.2 |
| | 1,675 |
| | 2.2 |
| | (974 | ) | | (1.8 | ) |
Tax exempt income - investments, net | | (5,395 | ) | | (5.4 | ) | | (3,849 | ) | | (5.0 | ) | | (3,463 | ) | | (6.3 | ) |
Bank-owned life insurance | | (1,556 | ) | | (1.6 | ) | | (1,364 | ) | | (1.8 | ) | | (1,284 | ) | | (2.4 | ) |
Non-deductible merger costs | | 368 |
| | 0.4 |
| | 542 |
| | 0.7 |
| | 422 |
| | 0.8 |
|
Non-deductible goodwill on disposal operations sale | | — |
| | — |
| | — |
| | — |
| | 313 |
| | 0.6 |
|
Tax credits, net of basis reduction | | (4,656 | ) | | (4.7 | ) | | (6,225 | ) | | (8.0 | ) | | (8,308 | ) | | (15.2 | ) |
Change in valuation allowance | | 75 |
| | 0.1 |
| | 125 |
| | 0.2 |
| | — |
| | — |
|
Impact of federal tax reform enactment | | 18,145 |
| | 18.2 |
| | — |
| | — |
| | — |
| | — |
|
Other, net | | 377 |
| | 0.4 |
| | 772 |
| | 1.0 |
| | (746 | ) | | (1.4 | ) |
Effective tax rate | | $ | 44,502 |
| | 44.6 | % | | $ | 18,784 |
| | 24.3 | % | | $ | 5,064 |
| | 9.3 | % |
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of US GAAP in situations when a registrant does not have the necessary information available to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (the "2017 Act"). SAB 118 allows for adjustments to the tax provision for up to one year from the enactment date (the measurement period). Any provisional amounts or adjustments to provisional amounts included in the Company’s financial statements during the measurement period will be included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period the amounts are determined.
The Company recorded provisional amounts of deferred income taxes using reasonable estimates in five areas where the information necessary to determine the final deferred tax asset or liability was either not available, not prepared, or not sufficiently analyzed as of the report filing date: 1) The deferred tax liability for temporary differences between the tax and financial reporting bases of fixed assets is awaiting completion and implementation of software updates to process the calculations associated with the Act's provisions allowing for direct expensing of qualified assets. 2) The net deferred tax asset for temporary differences associated with Commerce acquired tax attributes is awaiting final determinations of those amounts, some of which remain provisional. 3) The net deferred tax liability for loan servicing rights is awaiting formal approval from the Internal Revenue Service of a requested tax accounting method change with respect to these rights. 4) The net deferred tax asset for temporary differences associated with equity investments in partnerships is awaiting the receipt of Schedules K-1 from outside preparers, which is necessary to determine the 2017 tax impact from these investments.
In a fifth area, the Company made no adjustments to deferred tax assets representing future deductions for accrued compensation that may be subject to new limitations under Internal Revenue Code Section 162(m) which, generally, limits the annual deduction for certain compensation paid to certain employees to $1 million. As of the report filing date, there is uncertainty regarding how the newly-enacted rules in this area apply to existing contracts. Consequently, the Company is seeking further clarification of these matters before completing the analysis.
The Company will complete and record the income tax effects of these provisional items during the period the necessary information becomes available. This measurement period will not extend beyond December 22, 2018.
Deferred Tax Liabilities and Assets
As of December 31, 2017 and 2016, significant components of the Company’s deferred tax assets and liabilities were, as follows:
|
| | | | | | | | |
(In thousands) | | 2017 | | 2016 |
Deferred tax assets: | | |
| | |
|
Allowance for loan losses | | $ | 14,578 |
| | $ | 17,747 |
|
Tax credit carryforwards | | 4,100 |
| | 4,100 |
|
Unrealized capital loss on tax credit investments | | 6,502 |
| | 6,999 |
|
Employee benefit plans | | 4,983 |
| | 7,813 |
|
Purchase accounting adjustments | | 37,843 |
| | 23,520 |
|
Net operating loss carryforwards | | 1,374 |
| | 2,643 |
|
Other | | 2,332 |
| | 4,997 |
|
Deferred tax assets, net before valuation allowances | | 71,712 |
| | 67,819 |
|
Valuation allowance | | (200 | ) | | (125 | ) |
Deferred tax assets, net of valuation allowances | | $ | 71,512 |
| | $ | 67,694 |
|
| | | | |
Deferred tax liabilities: | | |
| | |
|
Net unrealized gain on swaps, securities available for sale, and pension in OCI | | $ | (1,888 | ) | | $ | (5,884 | ) |
Premises and equipment | | (1,126 | ) | | (2,519 | ) |
Loan servicing rights | | (2,174 | ) | | (4,546 | ) |
Deferred loan fees | | (3,900 | ) | | — |
|
Intangible amortization | | (15,001 | ) | | (11,543 | ) |
Other | | (362 | ) | | (2,074 | ) |
Deferred tax liabilities | | $ | (24,451 | ) | | $ | (26,566 | ) |
Deferred tax assets, net | | $ | 47,061 |
| | $ | 41,128 |
|
The Company’s net deferred tax asset increased by $5.9 million during 2017, including $34.5 million from the acquisition of Commerce resulting in a reduction in goodwill, $3.1 million deferred tax benefit recognized as an increase in shareholder's equity, and an $18.1 million deferred tax expense to re-measure the net deferred tax assets as a result of the federal tax reform enactment. Refer to Note 2 - Acquisitions for more information about the acquisition of Commerce.
Deferred tax assets, net of valuation allowances, are expected to be realized through the reversal of existing taxable temporary differences and future taxable income.
Valuation Allowances
The components of the Company’s valuation allowance on its deferred tax asset, net as of December 31, 2017 and 2016 were, as follows:
|
| | | | | | | | |
(in thousands) | | 2017 | | 2016 |
State tax basis difference, net of Federal tax benefit | | $ | (200 | ) | | $ | (125 | ) |
Valuation allowances | | $ | (200 | ) | | $ | (125 | ) |
The state tax basis difference, net of Federal tax benefit was originally recorded in 2012, due to management’s assessment that it is more likely than not that certain deferred tax assets recorded for the difference between the book basis and the state tax basis in certain tax credit limited partnership investments (LPs) will not be realized. Management anticipates that the remaining excess state tax basis will be realized as a capital loss upon disposition, and that it is unlikely that the Company will have capital gains against which to offset such capital losses.
During 2017, the valuation allowance increased by $75 thousand and the change was recorded as an increase to income tax expense.
The valuation allowances as of December 31, 2017 are subject to change in the future as the Company continues to periodically assess the likelihood of realizing its deferred tax assets.
Tax Attributes
At December 31, 2017, the Company has $6.5 million of federal net operating loss carryforwards, $3.3 million of New Jersey net operating loss carryforwards, and $13.9 million of Connecticut net operating loss carryforwards available that were obtained through acquisition, the utilization of which are limited under Internal Revenue Code Section 382. No deferred tax asset has been recorded for the Connecticut net operating loss carryforward since the state of Connecticut does not currently allow a deduction for net operating losses. These net operating losses begin to expire in 2024. The related deferred tax asset is $1.4 million. In addition, the Company has alternative minimum tax credit carryforwards of $4.0 million, which the Company expects to be monetized over the next two years.
Unrecognized Tax Benefits
On a periodic basis, the Company evaluates its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This evaluation takes into consideration the status of taxing authorities’ current examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment in relation to uncertain tax positions.
The following table presents changes in unrecognized tax benefits for the years ended December 31, 2017, 2016, and 2015:
|
| | | | | | | | | | | | |
(In thousands) | | 2017 | | 2016 | | 2015 |
Unrecognized tax benefits at January 1 | | $ | 460 |
| | $ | 307 |
| | $ | 553 |
|
Increase in gross amounts of tax positions related to prior years | | — |
| | 270 |
| | — |
|
Decrease in gross amounts of tax positions related to prior years | | (156 | ) | | — |
| | — |
|
Decrease due to settlement with taxing authority | | — |
| | — |
| | — |
|
Increase in gross amounts of tax positions related to current year | | — |
| | — |
| | — |
|
Decrease due to lapse in statute of limitations | | — |
| | (117 | ) | | (246 | ) |
Unrecognized tax benefits at December 31 | | $ | 304 |
| | $ | 460 |
| | $ | 307 |
|
It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change from the reevaluation of uncertain tax positions arising in examinations, in appeals, or in the courts, or from the closure of tax statutes. The Company does not expect any significant changes in unrecognized tax benefits during the next twelve months.
All of the Company’s unrecognized tax benefits, if recognized, would be recorded as a component of income tax expense, therefore, affecting the effective tax rate. The Company recognizes interest and penalties, if any, related to the liability for uncertain tax positions as a component of income tax expense. The accrual for interest and penalties was not material for all years presented.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction as well as in various states. In the normal course of business, the Company is subject to U.S. federal, state, and local income tax examinations by tax authorities. The Company is no longer subject to examination for tax years prior to 2014 including any related income tax filings from its recent acquisitions. The Company has been selected for audit in the state of New York for tax years 2013-2014.