NOTE M—INCOME TAXES
The income tax provisions included in the consolidated statements of income are summarized as follows:
| (In thousands) | Year Ended December 31 | |||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Current (benefit) expense: |
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Federal |
$ | 65,459 | $ | 63,169 | $ | 58,373 | ||||||
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State |
7,960 | 5,154 | 5,428 | |||||||||
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Deferred expense: |
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Federal |
20,920 | 8,844 | 1,657 | |||||||||
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Tax Act remeasurement |
37,732 | 0 | 0 | |||||||||
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State |
2,175 | (1,592 | ) | 72 | ||||||||
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Total income taxes |
$ | 134,246 | $ | 75,575 | $ | 65,530 | ||||||
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On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act lowered the Federal corporate tax rate from 35% to 21% effective January 1, 2018 and made numerous other tax law changes. U.S. generally accepted accounting principles (GAAP) requires companies to recognize the effect of tax law changes in the period of enactment. As a result of the Tax Act, United was required to remeasure deferred tax assets and liabilities at the new tax rate and as a result, recorded deferred tax expense of $37,732,000 in the fourth quarter of 2017. Reasonable estimates were made based on the Company’s analysis of the Tax Act. This provisional amount may be adjusted in future periods during 2018 when additional information is obtained as provided for under Staff Accounting Bulletin (“SAB 118”). Additional information that may affect our provisional amount would include further clarification and guidance on how the IRS will implement tax reform, further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on the Company’s state income tax returns, completion of United’s 2017 tax return filings, and the potential for additional guidance from the SEC or the FASB related to the Tax Act. Management continues to evaluate other potential impacts of the Tax Act. The Company did not identify items for which the income tax effects of the Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017.
The following is a reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate to income before income taxes.
| Year Ended December 31 | ||||||||||||||||||||||||
| (Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
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Tax on income before taxes at statutory federal rate |
$ | 99,689 | 35.0% | $ | 77,930 | 35.0% | $ | 71,222 | 35.0% | |||||||||||||||
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Plus: State income taxes net of federal tax benefits |
6,207 | 2.2 | 4,084 | 1.8 | 3,516 | 1.7 | ||||||||||||||||||
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| 105,896 | 37.2 | 82,014 | 36.8 | 74,738 | 36.7 | |||||||||||||||||||
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Increase (decrease) resulting from: |
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Tax-exempt interest income |
(5,362 | ) | (1.9 | ) | (3,919 | ) | (1.8 | ) | (4,158 | ) | (2.0 | ) | ||||||||||||
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Deferred taxes due to the Tax Act |
37,732 | 13.2 | 0 | 0.0 | 0 | 0.0 | ||||||||||||||||||
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Historic tax credit |
0 | 0.0 | 0 | 0.0 | (1,262 | ) | (0.6 | ) | ||||||||||||||||
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Other items-net |
(4,020 | ) | (1.4 | ) | (2,520 | ) | (1.1 | ) | (3,788 | ) | (1.9 | ) | ||||||||||||
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Income taxes |
$ | 134,246 | 47.1% | $ | 75,575 | 33.9% | $ | 65,530 | 32.2% | |||||||||||||||
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For years ended 2017, 2016 and 2015, United incurred federal income tax expense applicable to the sales and calls of securities of $2,088,000, $114,000, and $73,000, respectively. Income taxes paid approximated $73,096,000, $61,905,000, and $52,319,000 in 2017, 2016 and 2015, respectively. 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. At December 31, 2017, United had no federal or state net operating loss carryforwards.
Taxes not on income, which consists mainly of business franchise taxes, were $12,586,000, $7,778,000, and $7,055,000 for the years ended December 31, 2017, 2016 and 2015, respectively. These amounts are recorded in other expense in the Consolidated Statements of Income.
Significant components of United’s deferred tax assets and liabilities (included in other assets in the Consolidated Balance Sheets) at December 31, 2017 and 2016 are as follows:
| (In thousands) | 2017 | 2016 | ||||||
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Deferred tax assets: |
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Allowance for credit losses |
$ | 18,012 | $ | 26,941 | ||||
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Accrued benefits payable |
12,175 | 0 | ||||||
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Other accrued liabilities |
779 | 3,478 | ||||||
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Unrecognized components of net periodic pension costs |
13,443 | 20,166 | ||||||
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Unrealized loss on securities available for sale |
2,797 | 1,436 | ||||||
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Premises and equipment |
0 | 93 | ||||||
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Other real estate owned |
3,169 | 6,724 | ||||||
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Deferred mortgage points |
3,028 | 0 | ||||||
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Purchase accounting intangibles |
14,855 | 41,392 | ||||||
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Total deferred tax assets |
68,258 | 100,230 | ||||||
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Deferred tax liabilities: |
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Deferred mortgage points |
2,994 | 3,608 | ||||||
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Accrued benefits payable |
0 | 4,061 | ||||||
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Premises and equipment |
0 | 0 | ||||||
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Other |
1,627 | 13,687 | ||||||
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Total deferred tax liabilities |
4,621 | 21,356 | ||||||
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Net deferred tax assets |
$ | 63,637 | $ | 78,874 | ||||
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At December 31, 2017 and 2016, United believes that all of the deferred tax amounts shown above are more likely than not to be realized based on an assessment of all available positive and negative evidence and therefore no valuation allowance has been recorded.
In accordance with ASC topic 740, “Income Taxes,” United records a liability for uncertain income tax positions based on a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken on a tax return, in order for those tax positions to be recognized in the financial statements.
Below is a reconciliation of the total amounts of unrecognized tax benefits:
| December 31 | ||||||||
| (In thousands) | 2017 | 2016 | ||||||
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Unrecognized tax benefits at beginning of year |
$ | 2,442 | $ | 2,102 | ||||
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Increase in unrecognized tax benefits as a result of tax positions taken during the current period |
972 | 673 | ||||||
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Decreases in the unrecognized tax benefits as a result of a lapse of the applicable statute of limitations |
(520) | (333) | ||||||
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Unrecognized tax benefits at end of year |
$ | 2,894 | $ | 2,442 | ||||
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The entire amount of unrecognized tax benefits, if recognized, would impact United’s effective tax rate. Over the next 12 months, the statute of limitations will close on certain income tax returns. However, at this time, United cannot reasonably estimate the amount of tax benefits, if any, it may recognize over the next 12 months.
United is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2014, 2015 and 2016 and certain State Taxing authorities for the years ended December 31, 2014 through 2016.
As of December 31, 2017 and 2016, the total amount of accrued interest related to uncertain tax positions was $670,000 and $569,000, respectively. United accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes. No interest or penalties were recognized in the results of operations for the years of 2017, 2016 and 2015.