Income Taxes

12 Months Ended

Dec. 31, 2019

16. INCOME TAXES

The Company and its subsidiaries file a consolidated federal income tax return and separate state income tax returns. Our income tax provision consists of the following:


	Year ended December 31,
(Dollars in thousands)	2019		2018		2017
Current income taxes:
Federal taxes	$	31,401	$	26,164	$	36,005
State and local taxes	7,977		6,513		4,342
Deferred income taxes:
Federal taxes	5,987		3,455		17,899
State and local taxes	1,087		(77)		—
Total	$	46,452	$	36,055	$	58,246

Current federal income taxes include taxes on income that cannot be offset by net operating loss carryforwards.

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. The following is a summary of the significant components of our deferred tax assets and liabilities as of December 31, 2019 and 2018:


(Dollars in thousands)	2019		2018
Deferred tax assets:
Unrealized losses on available-for-sale securities	$	—	$	4,350
Allowance for loan and lease losses	9,991		8,303
Purchase accounting adjustments—loans	32,333		2,427
Reserves and other accruals	14,663		10,426
Investments	2,323		—
Deferred gains	465		458
Net operating losses	142		165
Derivatives	182		775
Employee benefit plans	3,581		—
Lease liabilities	38,181		—
Reverse mortgages	26		384
Total deferred tax assets	$	101,887	$	27,288
Deferred tax liabilities:
Unrealized gains on available-for-sale securities	$	(8,651)	$	—
Unrealized gains on equity investments	(10,031)		(4,203)
Accelerated depreciation	(1,745)		(806)
Other	(841)		(537)
Right of use assets	(34,907)		—
Deferred loan costs	(2,843)		(2,052)
Intangibles	(24,625)		(4,130)
Total deferred tax liabilities	(83,643)		(11,728)
Net deferred tax asset	$	18,244	$	15,560

Included in the table above is the effect of certain temporary differences for which no deferred tax expense or benefit was recognized. In 2019, such items consisted primarily of $8.7 million of unrealized gains on certain investments in debt and equity securities accounted for under ASC 320 along with $1.2 million of unrealized losses related to postretirement benefit obligations accounted for under ASC 715 and $0.2 million of unrealized losses on derivatives accounted for under ASC 815. In 2018, they consisted primarily of $4.4 million of unrealized losses on certain investments in debt and equity securities along with $0.3 million of unrealized gains related to postretirement benefit obligations and $0.8 million of unrealized losses on derivatives.

Based on our history of prior earnings and our expectations of the future, it is anticipated that operating income and the reversal pattern of our temporary differences will, more likely than not, be sufficient to realize a net deferred tax asset of $18.2 million at December 31, 2019.

As a result of the acquisition of Beneficial on March 1, 2019, we recorded a net deferred tax asset (DTA) of $18.9 million. Included in the DTA are $12.7 million of federal net operating loss (NOL) carryovers and $1.0 million of state NOL’s, all of which are expected to be utilized in our 2019 tax returns. We expect to utilize all tax attributes acquired from Beneficial so no valuation allowance has been recorded against the DTA.

Pursuant to accounting guidance, we are not required to provide deferred taxes on Beneficial’s tax loan loss reserve as of December 31, 1987. As of December 31, 2019, Beneficial had unrecognized deferred income taxes of approximately $1.7 million with respect to this reserve. This reserve could be recognized as taxable income and create a current and/or deferred tax liability using the income tax rates then in effect if one of the following occur: (1) the Bank’s retained earnings represented by this reserve are used for distributions in liquidation or for any other purpose other than to absorb losses from bad debts; (2) the Bank fails to qualify as a Bank, as provided by the Internal Revenue Code; or (3) there is a change in federal tax law.

On December 22, 2017 the Tax Reform Act (the Act) was enacted. As a result, we were required to re-measure our existing net deferred tax asset (DTA) on that date based on the future federal corporate income tax rate of 21%. This DTA re-measurement resulted in a one-time charge to income tax expense in 2017 in the amount of $14.5 million, which we estimated as required under ASC 740 and which was based on our initial analysis of the impact of the provisions of the Act. During 2018, we recorded certain tax provision to tax return true-up adjustments associated with items that were finalized as part of our 2017 tax return filing during the year. We recorded a $0.9 million tax benefit in 2018, primarily for deferred tax temporary difference items that were claimed on the 2017 tax return at a 35% federal tax rate that were recorded at December 31, 2017 as anticipating to be deducted at a 21% federal tax rate. There were no remaining provisional items as of December 31, 2018.

Due to the reduction in the corporate tax rate resulting from the Tax Reform Act, in 2017, we decided to surrender substantially all of our bank-owned life insurance (BOLI) policies. While the formal surrender did not occur until 2018, we were required under ASC 740, Income Taxes, to record a deferred tax liability in 2017 for the income tax effect of the surrender. We owed approximately $7.5 million for federal income taxes and an early-surrender penalty in 2018 due to the BOLI surrender.

A reconciliation showing the differences between our effective tax rate and the U.S. Federal statutory tax rate is as follows:


	Year ended December 31,
Year Ended December 31,	2019		2018		2017
Statutory federal income tax rate	21.0	%	21.0	%	35.0	%
State tax, net of federal tax benefit	3.5		3.1		2.7
Surrender of bank-owned life insurance policies	—		—		7.3

Adjustment to net deferred tax asset for enacted changes in tax laws and rates	—		(0.5)		13.4
Tax-exempt interest	(0.6)		(0.8)		(1.9)
Bank-owned life insurance income	(0.1)		—		(0.5)
Excess tax benefits from share-based compensation	(1.0)		(1.8)		(2.0)
Nondeductible acquisition costs	0.2		0.4		—
Federal tax credits, net of amortization	(0.2)		(0.1)		(0.3)
Nondeductible compensation	0.9		—		—
Other	0.2		(0.2)		—
Effective tax rate	23.9	%	21.1	%	53.7	%

As a result of the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, we recorded $2.0 million, $3.5 million and $2.3 million of income tax benefits in 2019, 2018 and 2017, respectively, related to excess tax benefits from stock compensation. Prior to 2016, such excess tax benefits were recorded directly in stockholders’ equity. This accounting standard will result in volatility to future effective tax rates.

We have $0.7 million of remaining Federal NOLs. Such NOLs expire beginning in 2030 and, due to Internal Revenue Service (IRS) limitations, $0.1 million are being utilized each year. Accordingly, we fully expect to utilize all of these NOLs. We have no state NOLs.

ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. Benefits from tax positions are recognized in the financial statements only when it is more-likely-than-not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC 740 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.

We record interest and penalties on potential income tax deficiencies as income tax expense. Federal tax years 2016 through 2019 remain subject to examination as of December 31, 2019, while tax years 2016 through 2019 remain subject to examination by state taxing jurisdictions. No federal or state income tax return examinations are currently in process. We do not expect to record or realize any material unrecognized tax benefits during 2020.

ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. We recognize, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Consolidated Financial Statements. Assessment of uncertain tax positions under ASC 740 requires careful consideration of the technical merits of a position based on our analysis of tax regulations and interpretations. There are no unrecognized tax benefits related to ASC 740 as of December 31, 2019 nor has there been any unrecognized tax benefit activity since December 31, 2012.

As a result of the adoption of ASU No. 2014-01, “Investments-Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects,” the amortization of our low-income housing credit investments has been reflected as income tax expense. Accordingly, $3.0 million of such amortization has been reflected as income tax expense for the year ended December 31, 2019, compared to $1.9 million and $1.7 million for the years ended December 31, 2018 and December 31, 2017, respectively.

The amount of affordable housing tax credits, amortization and tax benefits recorded as income tax expense for the year ended December 31, 2019 were $2.6 million, $3.0 million and $0.8 million respectively. The carrying value of the investment in affordable housing credits is $25.8 million December 31, 2019, compared to $16.9 million December 31, 2018.