Note 10—Income Taxes
The Tax Cut and Jobs Act (“Tax Reform”) enacted on December 22, 2017 reduced the U.S. federal statutory income tax rate from 35% to 21% effective January 1, 2018. As a result of the new law, the Company recorded a $19.0 million write-off of the Company’s net deferred tax asset, which was recorded as additional income tax expense in the fourth quarter of 2017.
The components of the consolidated income tax expense are as follows:
|
|
|
For the Year Ended December 31, |
|
|||||||||
|
(In thousands) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
33,799 |
|
|
$ |
24,394 |
|
|
$ |
22,024 |
|
|
State |
|
|
2,458 |
|
|
|
2,166 |
|
|
|
1,013 |
|
|
Total current expense |
|
|
36,257 |
|
|
|
26,560 |
|
|
|
23,037 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
44,009 |
|
|
|
5,439 |
|
|
|
(3,266 |
) |
|
State |
|
|
380 |
|
|
|
541 |
|
|
|
338 |
|
|
Total deferred (benefit) expense |
|
|
44,389 |
|
|
|
5,980 |
|
|
|
(2,928 |
) |
|
Total income tax expense |
|
$ |
80,646 |
|
|
$ |
32,540 |
|
|
$ |
20,109 |
|
A reconciliation of total income tax expense for each of the years in the period ended December 31 2017 to amounts determined by applying the statutory Federal income tax rate of 35% to income before taxes is as follows:
|
|
|
For the Year Ended December 31, |
|
|||||||||
|
(In thousands) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Computed income tax expense at statutory rate |
|
$ |
64,050 |
|
|
$ |
34,410 |
|
|
$ |
20,778 |
|
|
Effects of tax reform |
|
|
19,022 |
|
|
|
— |
|
|
|
— |
|
|
Tax exempt interest, net |
|
|
(3,988 |
) |
|
|
(2,744 |
) |
|
|
(842 |
) |
|
BOLI income |
|
|
(1,148 |
) |
|
|
(1,023 |
) |
|
|
(1,037 |
) |
|
State tax expense |
|
|
2,279 |
|
|
|
1,760 |
|
|
|
878 |
|
|
Tax credits |
|
|
(384 |
) |
|
|
(266 |
) |
|
|
(243 |
) |
|
Management compensation |
|
|
116 |
|
|
|
210 |
|
|
|
353 |
|
|
Other, net |
|
|
699 |
|
|
|
193 |
|
|
|
222 |
|
|
Total income tax expense |
|
$ |
80,646 |
|
|
$ |
32,540 |
|
|
$ |
20,109 |
|
As a result of Tax Reform enacted on December 22, 2017, deferred taxes are based on the newly enacted U.S. federal statutory income tax rate of 21%. Deferred taxes as of December 31, 2016 are based on the previously enacted U.S. statutory federal income tax rate of 35%. The provisional amount recorded related to the remeasurement of the Company’s deferred tax asset was $19.0 million, which was recorded as income tax expense. Based on the information available and our current interpretation of Tax Reform, the Company has made reasonable estimates of the impact from the reduction in the U.S. federal statutory rate on the remeasurement of the deferred tax asset. However, the Company’s deferred tax asset will continue to be evaluated in the context of Tax Reform, and may change as a result of evolving management interpretations, elections, and assumptions, as well as new guidance that may be issued by the Internal Revenue Service. Accordingly, the income tax expense of $19.0 million relating to the effects from Tax Reform is considered provisional, as defined by SAB 118. Management expects to complete its analysis within the measurement period in accordance with SAB 118.
The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows:
|
|
|
As of December 31, |
|
|||||
|
(In thousands) |
|
2017 |
|
|
2016 |
|
||
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
18,464 |
|
|
$ |
30,710 |
|
|
Nonaccrual interest |
|
|
— |
|
|
|
7,410 |
|
|
Deferred compensation |
|
|
3,440 |
|
|
|
3,681 |
|
|
Accrued compensation |
|
|
2,506 |
|
|
|
7,962 |
|
|
Net operating loss carryforwards |
|
|
9,859 |
|
|
|
16,154 |
|
|
Alternative minimum tax credit carryover |
|
|
978 |
|
|
|
978 |
|
|
Unrealized loss on securities, net |
|
|
1,271 |
|
|
|
13,829 |
|
|
Unrealized loss on derivative instruments |
|
|
4,912 |
|
|
|
5,911 |
|
|
Other |
|
|
5,344 |
|
|
|
9,320 |
|
|
Excess of tax basis in assets acquired: |
|
|
|
|
|
|
|
|
|
Loans |
|
|
841 |
|
|
|
8,673 |
|
|
Other real estate owned |
|
|
13 |
|
|
|
1,342 |
|
|
Other |
|
|
— |
|
|
|
4 |
|
|
Total deferred income tax assets |
|
|
47,628 |
|
|
|
105,974 |
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
|
Difference in book and tax basis of intangibles |
|
|
1,927 |
|
|
|
4,268 |
|
|
Other |
|
|
4,213 |
|
|
|
4,564 |
|
|
Excess of book basis in assets acquired and tax liabilities assumed over book carrying value: |
|
|
|
|
|
|
|
|
|
Intangibles |
|
|
7,122 |
|
|
|
7,798 |
|
|
Other |
|
|
3,592 |
|
|
|
5,682 |
|
|
Total deferred income tax liabilities |
|
|
16,854 |
|
|
|
22,312 |
|
|
Net deferred income tax asset |
|
$ |
30,774 |
|
|
$ |
83,662 |
|
ASC Topic 740, “Income Taxes,” requires that deferred tax assets be reduced if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Management’s determination of the realizability of deferred tax assets is based on its evaluation of all available evidence both positive and negative, and its expectation regarding various future events, including the reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Positive evidence supporting the realization of the Company’s deferred tax assets at December 31, 2017, includes generation of taxable income since 2012, the Company’s strong capital position, as well as sufficient amounts of projected future taxable income, of the appropriate character, to support the realization of the $30.8 million at December 31, 2017. In order to fully realize the deferred tax asset, the Company will need to general future taxable income of $169.9 million before the end of the statutory net operating loss carryforward period. Based on the assessment of all positive and negative evidence at December 31, 2017 and 2016, management has concluded that it is more likely than not that the results of future operations will generate sufficient taxable income realize the deferred tax assets.
Management’s estimate of future taxable income is based on internal projections, various internal assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. Projected future taxable income is primarily expected to be generated through loan growth at the bank, investment strategies and revenue from successful cross initiatives and the control of expenses through operating effectiveness, all in the context of a macro-economic environment that continues to trend favorably. If actual results differ significantly from the current estimates of future taxable income, a valuation allowance may need to be recorded for some portion or all of the net deferred tax asset. Such an increase to the deferred tax asset valuation allowance could have a material adverse effect on the Company’s consolidated balance sheets and consolidated statements of income.
The acquisitions of Cadence Financial Corporation and Encore resulted in an "ownership change" as defined for U.S. federal income tax purposes under Section 382 of the Internal Revenue Code. As a result of the operation of Section 382, the Company is not able to fully utilize a portion of our U.S. federal and state tax net operating losses and certain built-in losses that have not been recognized for tax purposes. An ownership change under Section 382 generally occurs when a change in the aggregate percentage ownership of the stock of the corporation held by five percent stockholders increases by more than fifty percentage points over a rolling three-year period. A corporation experiencing an ownership change generally is subject to an annual limitation on its utilization of pre-change losses and certain post-change recognized built-in losses equal to the value of the stock of the corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate (subject to certain adjustments). The annual limitation is increased each year to the extent that there is an unused limitation in a prior year. Since U.S. federal net operating losses generally may be carried forward for up to 20 years, the annual limitation also effectively provides a cap on the cumulative amount of pre-change losses and certain post-change recognized built-in losses that may be utilized. Pre-change losses and certain post-change recognized built-in losses in excess of the cap are effectively unable to be used to reduce future taxable income. The Company has estimated the amount of pre-change losses and certain post-change losses that are not expected to be utilized and has reduced the deferred tax asset at the acquisition date to reflect this limitation.
The acquisition of Superior Bank was an asset acquisition and is not subject to the limitations of Section 382.
As of December 31, 2017, the Company has federal net operating loss carryforwards of $41.1 million which will begin to expire in 2031. The Company has state net operating loss carryforwards of $27.9 million which will begin to expire in 2022. In addition, the Company has an AMT credit carryforward of $978,000 as of December 31, 2017, which has no expiration.
The Company and its subsidiaries are subject to U.S. federal income tax as well as various state and local income taxes. The Company has concluded all U.S. federal income tax matters for years before 2014. With certain limited exceptions, the Company has concluded all state income tax matters for years before 2013. The Company applies the guidance in ASC 740-10, “Accounting for Uncertainty in Income Taxes.” ASC 740-10 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. ASC 740-10 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more likely than not” to be sustained by the applicable tax authority based on technical merits of the position. Tax benefits from tax positions not deemed to meet the “more likely than not” threshold should not be recognized in the year of determination.
A reconciliation of the beginning and ending amount of unrecognized income tax benefits is as follows (unrecognized state income tax benefits are not adjusted for the federal income tax impact):
|
|
|
For the Year Ended December 31, |
|
|||||||||
|
(In thousands) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Unrecognized income tax benefits, January 1 |
|
$ |
944 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Increases for tax positions related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior years |
|
|
9 |
|
|
|
422 |
|
|
|
— |
|
|
Current year |
|
|
394 |
|
|
|
522 |
|
|
|
— |
|
|
Decreases for tax positions related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior years |
|
|
(453 |
) |
|
|
— |
|
|
|
— |
|
|
Current year |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Settlement with taxing authorities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Expiration of applicable statutes of limitations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Unrecognized income tax benefits, December 31 |
|
$ |
894 |
|
|
$ |
944 |
|
|
$ |
— |
|
As of December 31, 2017 and 2016, the balance of unrecognized tax benefits, if recognized, that would reduce the effective tax rate is $581,100 and $614,000, respectively. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits with the next 12 months.
The Company classifies interest and penalties on uncertain tax positions as a component of noninterest expense. During the years ended December 31, 2017 and 2016, the Company recognized approximately ($4,000) and $90,000 in interest and penalties. The Company’s accrued interest and penalties on unrecognized tax benefits was $88,000 and $90,000 as of December 31, 2017 and 2016, respectively. Accrued interest and penalties are included in other liabilities.