Investors Bancorp, Inc.

Income Taxes

The components of income tax expense are as follows:



	Years Ended December 31,
	2017			2016	2015
	(In thousands)
Current tax expense:
Federal	$	47,101		82,708	87,748
State	6,736			12,599	14,804
	53,837			95,307	102,552
Deferred tax expense (benefit):
Federal	105,044			8,107	4,310
State	(5,036		)	3,533	(7,490	)
	100,008			11,640	(3,180	)
Total income tax expense	$	153,845		106,947	99,372

The following table presents the reconciliation between the actual income tax expense and the “expected” amount computed using the applicable statutory federal income tax rate of 35%:



	Years Ended December 31,
	2017			2016		2015
				(In thousands)
“Expected” federal income tax expense	$	98,206		104,675		98,307
State tax, net	6,051			9,887		4,753
Impact of tax reform	49,164			—		—
Bank owned life insurance	(1,310		)	(1,548	)	(1,382	)
Excess tax benefits from employee share-based payments	(1,722		)	(7,735	)	—
Acquisition related net operating loss	—			—		(4,076	)
ESOP fair market value adjustment	1,237			931		947
Non-deductible compensation	1,451			1,602		276
Expiration of stock options	—			—		19
Other	768			(865	)	528
Total income tax expense	$	153,845		106,947		99,372

The temporary differences and loss carryforwards which comprise the deferred tax asset and liability are as follows:



	December 31,
	2017			2016
	(In thousands)
Deferred tax asset:
Employee benefits	$	21,201		34,218
Deferred compensation	994			1,596
Premises and equipment	—			1,587
Allowance for loan losses	67,307			92,738
Net unrealized loss on securities	12,542			17,078
Net other than temporary impairment loss on securities	—			40,228
ESOP	3,518			4,333
Allowance for delinquent interest	283			14,539
Fair value adjustments related to acquisitions	12,750			20,823
Charitable contribution carryforward	720			406
Loan origination costs	7,964			9,599
Intangible assets	—			—
State NOL	3,996			—
Other	1,720			1,305
Gross deferred tax asset	132,995			238,450
Valuation allowance	(284		)	(346	)
	132,711			238,104
Deferred tax liability:
Intangible assets	71			363
Discount accretion	—			4,080
Mortgage servicing rights	4,039			6,257
Premises and equipment	1,664			—
Net unrealized gain on hedging activities	5,274			5,127
Gross deferred tax liability	11,048			15,827
Net deferred tax asset	$	121,663		222,277

A deferred tax asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. The measurement of deferred tax assets is reduced by the amount of any tax benefits that, based on available evidence, are more likely than not to be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which those temporary differences and carryforwards become deductible. A valuation allowance is recorded for tax benefits which management has determined are not more likely than not to be realized.

On December 22, 2017, the President signed into law the Tax Act. The new law reduces the federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. Under ASC 740, “Income Taxes”, companies are required to recognize the effect of tax law changes in the period of enactment; therefore, the Company re-measured its deferred tax assets and liabilities at the enacted tax rate expected to apply when its temporary differences are expected to be realized or settled. As of the date of enactment, the resulting impact of the re-measurement of the Company’s deferred tax balances was $49.2 million.

Based on the Company’s standalone future state taxable income, a valuation allowance was established for the portion of the state tax benefit related to a prior year charitable contribution that is not more likely than not to be realized. At December 31, 2017, the Company’s valuation allowance pertaining to the charitable contribution was $284,000.

Based upon projections of future taxable income and the ability to carry forward net operating losses indefinitely, management believes it is more likely than not the Company will realize the remaining deferred tax asset.

Retained earnings at December 31, 2017 included approximately $45.2 million for which deferred income taxes of approximately $13.8 million have not been provided. The retained earnings amount represents the base year allocation of income to bad debt deductions for tax purposes only. Base year reserves are subject to recapture if the Bank makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter. Under ASC 740, this amount is treated as a permanent difference and deferred taxes are not recognized unless it appears that it will be reduced and result in taxable income in the foreseeable future. Events that would result in taxation of these reserves include failure to qualify as a bank for tax purposes or distributions in complete or partial liquidation.

The Company had no unrecognized tax benefits or related interest or penalties at December 31, 2017 and 2016.

The Company files income tax returns in the United States federal jurisdiction and in the states of New Jersey, New York and Pennsylvania. As of December 31, 2017, the Company is no longer subject to federal income tax examination for years prior to 2014. Investors Bank and its affiliates are currently under audit by the New York State Department of Taxation and Finance for tax years 2013 and 2014. The Company is no longer subject to income tax examination by New Jersey and New York for years prior to 2013 and 2014, respectively.