The components of the income tax expense for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Current tax provision (benefit): | | | | | |
Federal | $ | (1,289 | ) | | $ | 6,262 |
| | $ | 1,302 |
|
State | 994 |
| | 2,202 |
| | 1,345 |
|
Total current | (295 | ) | | 8,464 |
| | 2,647 |
|
Deferred tax provision (benefit): | | | | | |
Federal | 9,518 |
| | (3,698 | ) | | 3,275 |
|
State | 1,421 |
| | (654 | ) | | 307 |
|
Effect of tax rate change due to tax reform | 1,399 |
| | — |
| | — |
|
Total deferred | 12,338 |
| | (4,352 | ) | | 3,582 |
|
Total income tax expense | $ | 12,043 |
| | $ | 4,112 |
| | $ | 6,229 |
|
For the years ended December 31, 2017, 2016 and 2015, the provision for income taxes differs from the amount computed by applying the statutory Federal income tax rate of 35% to pre-tax income for the following reasons:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Provision for income tax at statutory rate | $ | 23,332 |
| | $ | 18,820 |
| | $ | 19,554 |
|
Increase (decrease) resulting from: | | | | | |
State income taxes, net of federal benefit | 1,298 |
| | 1,006 |
| | 1,074 |
|
Increase in cash surrender value of bank-owned life insurance | (1,912 | ) | | (1,188 | ) | | (1,266 | ) |
Dividend received deduction | (179 | ) | | (544 | ) | | (471 | ) |
Tax exempt interest net of disallowed interest expense | (4,778 | ) | | (3,726 | ) | | (3,826 | ) |
Employee Stock Ownership Plan | 60 |
| | 28 |
| | 25 |
|
Excess parachute payments | — |
| | — |
| | 442 |
|
Investment tax credits | (9,581 | ) | | (10,541 | ) | | (8,649 | ) |
Effect of tax rate change due to tax reform | 1,399 |
| | — |
| | — |
|
Gain on surrender of BOLI | 2,377 |
| | — |
| | — |
|
Other, net | 27 |
| | 257 |
| | (654 | ) |
Total provision for income taxes | $ | 12,043 |
| | $ | 4,112 |
| | $ | 6,229 |
|
| | | | | |
Effective income tax rate | 18.1 | % | | 7.6 | % | | 11.1 | % |
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In thousands) |
Deferred tax assets: | | | |
Loans | $ | 12,939 |
| | $ | 17,980 |
|
Investment security losses | 54 |
| | 97 |
|
Net unrealized losses on securities available for sale | 2,160 |
| | 4,816 |
|
Net unrealized losses on interest rate swaps | 511 |
| | 1,254 |
|
Pension, deferred compensation and post-retirement liabilities | 2,228 |
| | 3,010 |
|
Stock incentive award plan | 1,251 |
| | 1,939 |
|
Deposits - purchase accounting adjustment | 54 |
| | 369 |
|
Accrued expenses | — |
| | 8,799 |
|
Tax attributes - tax credits and net operating losses | 23,489 |
| | 7,938 |
|
Other | 1,773 |
| | 3,715 |
|
Gross deferred tax assets | 44,459 |
| | 49,917 |
|
Valuation allowance | (565 | ) | | (2,594 | ) |
Gross deferred tax assets, net of valuation allowance | 43,894 |
| | 47,323 |
|
| | | |
Deferred tax liabilities: | | | |
Other purchase accounting adjustments | (1,583 | ) | | (2,542 | ) |
Partnerships | (12,251 | ) | | (4,819 | ) |
Deferred loan origination fees | (4,070 | ) | | — |
|
Other | (334 | ) | | — |
|
Gross deferred tax liabilities | (18,238 | ) | | (7,361 | ) |
Net deferred tax asset | $ | 25,656 |
| | $ | 39,962 |
|
The Company assesses the realizability of our deferred tax assets and whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The Company considers projections of future taxable income during the periods in which deferred tax assets and liabilities are scheduled to reverse. Additionally, in determining the availability of operating loss carrybacks and other tax attributes, both projected future taxable income and tax planning strategies are considered in making this assessment. Based upon the level of available historical taxable income, projections for the Company’s future taxable income over the periods which the Company’s deferred tax assets are realizable, the Company believes it is more likely than not that it will realize the full federal benefit of these deductible differences at December 31, 2017 and 2016.
Net operating losses may be carried back to the preceding two taxable years for Federal income tax purposes and forward to the succeeding 20 taxable years for Federal and Connecticut state income tax purposes, subject to certain limitations. At December 31, 2017, the Company had net operating loss carryforwards of $1.2 million for Federal income tax purposes, which will begin to expire in 2023. These losses, subject to an annual limitation, were obtained through the acquisition of Legacy United Bank. As of December 31, 2017 and 2016, the Company had a valuation allowance of $565,000 and $2.6 million, respectively, against its state deferred tax asset absent net operating loss carryforwards, in connection with the creation of a Connecticut Passive Investment Company pursuant to legislation enacted in 1998. As of December 31, 2017 and 2016, the Company had $201.6 million and $197.5 million, respectively, in Connecticut net operating loss carryforwards that will begin to expire in 2023 and for which a 100% valuation allowance has been established. Under the Passive Investment Company legislation, Connecticut Passive Investment Companies are not subject to the Connecticut Corporate Business Tax and dividends paid by the passive investment company to the Company are exempt from the Connecticut Corporate Business Tax. The change in the valuation allowance was recognized through the effective tax rate.
As of December 31, 2017, the Company generated Federal and State tax credits of $11.6 million as compared to $12.5 million in Federal and State tax credits in 2016. These investment tax credits arose from either the acquisition of Legacy United Bank or through direct investment. These credit benefits are recognized through the effective tax rate in the year in which they are generated.
Retained earnings at December 31, 2017 includes a contingency reserve for loan losses of approximately $3.8 million, which represents the tax positions that existed at December 31, 1987, and is maintained in accordance with provisions of the Internal Revenue Code applicable to mutual savings banks. Amounts transferred to the reserve have been claimed as deductions from taxable income, and, if the reserve is used for purposes other than to absorb losses on loans, a Federal income tax liability could be incurred. It is not anticipated that the Company will incur a Federal income tax liability relating to this reserve balance, and accordingly, deferred income taxes of approximately $827,000 at December 31, 2017 have not been recognized.
As of December 31, 2017 and 2016, there were $688,000 and $497,000, respectively, recorded in uncertain tax benefit positions related to federal and state income tax matters based upon tax positions that related to the current year. The Company records interest and penalties as part of income tax expense. No interest or penalties were recorded for the years ended December 31, 2017, 2016 and 2015. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2014 and after.
On December 22, 2017, the Tax Act was enacted resulting in, amongst other tax reform items, a reduction in the Company's applicable U.S. Federal corporate tax rate from 35% to 21%. As a result of this rate reduction and changes in other provisions of the new law, the Company incurred a provisional adjustment of $1.8 million of additional tax expense as of December 31, 2017. The impact of tax reform is based upon reasonable estimates of new current and deferred taxes based on certain provisions within the Tax Act. Additionally, the impact is the result of adjustments to current and deferred taxes that existed prior to the Tax Act's enactment date.
On December 22, 2017, the SEC issued Staff Accounting Bulletin (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. The Company anticipates an immaterial impact for tax reform upon completion of the Company’s tax return for the 2017 tax year as a result of estimates related to accrued expenses and partnership investments.