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Income Taxes
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 2019, 2018 and 2017 consists of the following (in thousands):
 
 
For the Year Ended December 31,
 
 
2019
 
2018
 
2017
Current
 
 
 
 
 
 
Federal
 
$
1,991

 
$
18,030

 
$
(12,754
)
State
 
740

 
108

 
169

Total current
 
2,731

 
18,138

 
(12,585
)
Deferred
 
 
 
 
 
 
Federal
 
18,846

 
(4,568
)
 
35,440

State
 
(2,793
)
 

 

Total deferred
 
16,053

 
(4,568
)
 
35,440

 
 
$
18,784

 
$
13,570

 
$
22,855


Included in other comprehensive income is income tax expense attributable to the net accretion of unrealized losses on debt securities available-for-sale arising during the year in the amount of $874,000, $1.1 million, and $276,000 for the years ended December 31, 2019, 2018 and 2017, respectively. Effective January 1, 2017, the Company adopted ASU 2016-09 “Compensation - Stock Compensation,” which decreased income tax expense by $1.8 million for the year ended December 31, 2017. Under the ASU, the tax benefits of exercised stock options and vested stock awards are recognized as a benefit to income tax expense in the reporting period which they occur.
A reconciliation between the provision for income taxes and the expected amount computed by multiplying income before the provision for income taxes times the applicable statutory Federal income tax rate for the years ended December 31, 2019, 2018 and 2017 is as follows (in thousands):
 
 
For the Year Ended December 31,
 
 
2019
 
2018
 
2017
Income before provision for income taxes
 
$
107,358

 
$
85,502

 
$
65,325

Applicable statutory Federal income tax rate
 
21.0
%
 
21.0
%
 
35.0
%
Computed “expected” Federal income tax expense
 
$
22,545

 
$
17,955

 
$
22,864

(Decrease) increase in Federal income tax expense resulting from
 
 
 
 
 
 
Tax exempt interest
 
(665
)
 
(615
)
 
(839
)
ESOP fair market value adjustment
 
77

 
125

 
223

ESOP dividends
 
(151
)
 
(136
)
 
(230
)
Earnings on BOLI
 
(1,138
)
 
(1,072
)
 
(1,155
)
Merger related expenses
 
297

 
322

 
478

State income taxes net of Federal benefit
 
583

 
85

 
110

Stock compensation
 
(386
)
 
(758
)
 
(1,823
)
Revaluation of state deferred tax asset
 
(2,205
)
 

 

Impact of Tax Cuts and Jobs Act (“Tax Reform”)
 

 
(1,854
)
 
3,643

Reclassification of certain tax effect from accumulated other comprehensive income
 
(221
)
 
(586
)
 

Other items, net
 
48

 
104

 
(416
)
 
 
$
18,784

 
$
13,570

 
$
22,855



The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are presented in the following table (in thousands):
 
 
December 31,
 
 
2019
 
2018
Deferred tax assets:
 
 
 
 
Allowance for loan losses
 
$
4,107

 
$
3,501

Reserve for repurchased loans
 
112

 
55

Reserve for uncollected interest
 
212

 
119

Incentive compensation
 
1,397

 
1,302

Deferred compensation
 
591

 
529

Other reserves
 
2,737

 
334

Stock plans
 
1,270

 
950

ESOP
 
178

 
142

Purchase accounting adjustments
 
8,475

 
16,142

Net operating loss carryforward related to acquisition
 
39,519

 
44,436

Other real estate owned
 

 
90

Unrealized loss on securities
 
826

 
1,225

Unrealized loss on properties available-for-sale
 
1,438

 
1,266

 Federal and state alternative minimum tax
 
4,746

 
1,410

Total gross deferred tax assets
 
65,608

 
71,501

Deferred tax liabilities:
 
 
 
 
Investments, discount accretion
 
(380
)
 
(232
)
Deferred loan and commitment costs, net
 
(2,379
)
 
(1,478
)
Premises and equipment, differences in depreciation
 
(7,340
)
 
(4,350
)
Undistributed REIT income
 
(4,735
)
 
(1,730
)
Other
 
(707
)
 
(334
)
Total gross deferred tax liabilities
 
(15,541
)
 
(8,124
)
Net deferred tax assets
 
$
50,067

 
$
63,377



The 2019 deferred tax expense does not equal the change in net deferred tax assets as a result of deferred taxes recorded in
connection with the Capital Bank acquisition of approximately $3.1 million.
The Company has Federal net operating losses from the acquisitions of Colonial American, Cape and Sun. At December 31, 2019 and 2018, the net operating losses from Colonial American were $4.9 million and $5.3 million, respectively. These net operating losses are subject to annual limitation under Code Section 382 of approximately $330,000, and will expire between 2029 and 2034. At December 31, 2019 and 2018, the net operating losses from Cape were $0 and $3.0 million, respectively. These net operating losses were subject to annual limitation under Code Section 382 of approximately $4.5 million. At December 31, 2019 and 2018, the net operating losses from Sun were $175.9 million and $198.9 million, respectively. These net operating losses are subject to annual limitation under Code Section 382 of approximately $23.3 million, which will expire in 2022 and $9.3 million, which will expire between 2029 and 2036.
As of December 31, 2019 and 2018, the Company had $1.8 million of New Jersey AMA Tax Credits. These credits do not expire. As of December 31, 2019 and 2018, the Company had $1.0 million of AMT Tax Credits that were part of the Cape acquisition and $2.3 million of AMT Tax Credits that were part of the Sun acquisition. These credits are subject to the same Code Section 382 limitation as indicated above but do not expire.
At December 31, 2019, 2018 and 2017, the Company determined that it is not required to establish a valuation reserve for the remaining net deferred tax assets since it is “more likely than not” that the net deferred tax assets will be realized through future reversals of existing taxable temporary differences, future taxable income and tax planning strategies. The conclusion that it is “more likely than not” that the remaining net deferred tax assets will be realized is based on the history of earnings and the prospects for continued growth. Management will continue to review the tax criteria related to the recognition of deferred tax assets.
Retained earnings at December 31, 2019 includes approximately $10.8 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 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, 2019, the Company had an unrecognized deferred tax liability of $2.6 million with respect to this reserve.
There were no unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017. The tax years that remain subject to examination by the Federal government and the state of New York include the years ended December 31, 2016 and forward. The tax years that remain subject to examination by the state of New Jersey include the years ended December 31, 2015 and forward.
On July 1, 2018, New Jersey enacted changes to the corporate business tax laws. This legislation required a combined group to file combined returns for tax years beginning in 2019 and thereafter. However, due to technical issues and inconsistencies with existing tax law, it was initially determined that the tax law change did not have an impact on deferred taxes. In December 2019, the State of New Jersey issued a clarifying technical bulletin related to the impact of the new tax legislation enacted in July 2018. This technical bulletin provided clarification to the combined income tax reporting for certain members of a unitary business group.  Accordingly, this required a revaluation of some of the Company’s deferred tax assets. As a result of the revaluation of the state deferred tax assets, the Company recognized additional income tax benefit of $2.2 million for the year ended December 31, 2019.
With the enactment of the Tax Reform on December 22, 2017, the federal corporate income tax rate was reduced from 35% to 21% effective January 1, 2018. Accounting guidance requires that the effect of income tax law changes on deferred taxes should be recognized as a component of income tax expense related to continuing operations, but also to items initially recognized in other comprehensive income. As a result of the reduction in the U.S. federal statutory income tax rate, the Company recognized additional income tax benefit of $1.9 million for the year ended December 31, 2018 and additional income tax expense of $3.6 million for the year ended December 31, 2017. Because accounting guidance requires the effect of income tax law changes on deferred taxes to be recognized as a component of income tax expense related to continuing operations, this additional income tax expense included $1.8 million related to items recognized in other comprehensive income. These amounts will continue to be reported as separate components of accumulated other comprehensive income until such time as the underlying transactions from which such amounts arose are settled through continuing operations. At such time, the reclassification from accumulated other comprehensive income will be recognized as a net tax benefit. The amount included in accumulated other comprehensive income at December 31, 2019, subject to reclassification, was $1.1 million.