Income Taxes
The Tax Cuts and Jobs Act ("Tax Act") was signed into law on December 22, 2017. Included as part of the law, was a permanent reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. Based upon the change in the tax rate, the Company revalued its net deferred tax asset at December 31, 2017. As a result of the enactment of the Tax Act, the Company recognized an additional tax expense of $3.9 million for the year ended December 31, 2017.
The current and deferred amounts of income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):
|
| | | | | | | | | |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | 4,163 |
| | 32,506 |
| | 33,778 |
|
State | 1,731 |
| | 1,314 |
| | 2,337 |
|
Total current | 5,894 |
| | 33,820 |
| | 36,115 |
|
Deferred: | | | | | |
Federal | 39,003 |
| | 2,606 |
| | (525 | ) |
State | 1,631 |
| | 554 |
| | 851 |
|
Total deferred | 40,634 |
| | 3,160 |
| | 326 |
|
| $ | 46,528 |
| | 36,980 |
| | 36,441 |
|
The Company recorded deferred tax (benefit) of ($1.4) million, ($3.0) million and ($2.5) million during 2017, 2016 and 2015, respectively, related to the unrealized (loss) gain on securities available for sale, which is reported in accumulated other comprehensive income (loss), net of tax. Additionally, the Company recorded a deferred tax (benefit) expense of ($586,000), $2.3 million and $866,000 in 2017, 2016 and 2015, respectively, related to the amortization of post-retirement benefit obligations, which is reported in accumulated other comprehensive income, net of tax.
A reconciliation between the amount of reported total income tax expense and the amount computed by multiplying the applicable statutory income tax rate is as follows (in thousands):
|
| | | | | | | | | |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Tax expense at statutory rate of 35% | $ | 49,167 |
| | 43,674 |
| | 42,057 |
|
Increase (decrease) in taxes resulting from: | | | | | |
State tax, net of federal income tax benefit | 2,185 |
| | 1,215 |
| | 2,072 |
|
Tax-exempt interest income | (5,097 | ) | | (5,286 | ) | | (5,520 | ) |
Bank-owned life insurance | (2,343 | ) | | (1,915 | ) | | (1,871 | ) |
Enactment of Tax Act | 3,912 |
| | — |
| | — |
|
Other, net | (1,296 | ) | | (708 | ) | | (297 | ) |
| $ | 46,528 |
| | 36,980 |
| | 36,441 |
|
The net deferred tax asset is included in other assets in the consolidated statements of financial condition. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are as follows (in thousands):
|
| | | | | | |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Allowance for loan losses | $ | 14,884 |
| | 23,852 |
|
Post-retirement benefit | 7,265 |
| | 11,150 |
|
Deferred compensation | 1,382 |
| | 2,447 |
|
Purchase accounting adjustments | 1,242 |
| | 1,979 |
|
Depreciation | 2,284 |
| | 4,025 |
|
SERP | 651 |
| | 966 |
|
ESOP | 2,000 |
| | 3,203 |
|
Stock-based compensation | 4,066 |
| | 5,259 |
|
Non-accrual interest | 839 |
| | 3,738 |
|
Unrealized loss on securities | 1,180 |
| | 350 |
|
State NOL | 18 |
| | 81 |
|
Federal NOL | 270 |
| | 742 |
|
Pension liability adjustments | 1,495 |
| | 2,051 |
|
Other | 2,561 |
| | 1,817 |
|
Total gross deferred tax assets | 40,137 |
| | 61,660 |
|
Deferred tax liabilities: | | | |
Deferred REIT dividend | 22,264 |
| | — |
|
Pension expense | 6,857 |
| | 10,255 |
|
Deferred loan costs | 4,043 |
| | 5,477 |
|
Investment securities, principally due to accretion of discounts | 79 |
| | 167 |
|
Intangibles | 775 |
| | 548 |
|
Originated mortgage servicing rights | 184 |
| | 313 |
|
Total gross deferred tax liabilities | 34,202 |
| | 16,760 |
|
Net deferred tax asset | $ | 5,935 |
| | 44,900 |
|
Retained earnings at December 31, 2017 includes approximately $51.8 million for which no provision for income tax has been made. This amount represents an allocation of income to bad debt deductions for tax purposes only. Events that would result in taxation of these reserves include the failure to qualify as a bank for tax purposes, distributions in complete or partial liquidation, stock redemptions and excess distributions to stockholders. At December 31, 2017, the Company had an unrecognized tax liability of $13.7 million with respect to this reserve.
As a result of the Beacon Trust acquisition in 2011, the Company acquired federal net operating loss carryforwards. There are approximately $1.3 million of NOL carryforwards available to offset future taxable income as of December 31, 2017. If not utilized, these carryforwards will expire in 2031. Also, the Company's New Jersey NOL carryforwards are approximately $240,000 which are scheduled to expire in 2031. The federal NOLs are subject to a combined annual Code Section 382 limitation in the amount of approximately $840,000. Management has determined that it is more likely than not that it will realize the net deferred tax asset based upon the nature and timing of the items listed above. In order to fully realize the net deferred tax asset, the Company will need to generate future taxable income. Management has projected that the Company will generate sufficient taxable income to utilize the net deferred tax asset; however, there can be no assurance that such levels of taxable income will be generated.
The Company’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The Company did not have any liabilities for uncertain tax positions or any known unrecognized tax benefits at December 31, 2017 and 2016.
The Company and its subsidiaries file a consolidated U.S. Federal income tax return, separate New Jersey State income tax returns, and a combined New York State income tax return on apportioned and allocated income. The Company, through its bank subsidiary, files a Pennsylvania Mutual Thrift Institution Tax return. The Company's Federal and New York State income tax returns are open for examination from 2015, the New Jersey State income tax returns are open for examination from 2014, and the Pennsylvania Mutual Thrift Institutions return is open from 2015. During the fourth quarter of 2017, the Internal Revenue Service completed its examination of the Company's 2014 federal tax return. The completion of the examination did not have an impact on the Company's effective income tax rate. The Company's 2016 and 2015 New York State returns are currently under audit.