Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

The provision for income taxes for the years ended December 31 is comprised of the following components:



(In thousands)	2019		2018		2017
Income taxes currently payable	$	29,354	$	41,946	$	38,732
Deferred income taxes	34,911		8,412		23,251
Provision for income taxes	$	64,265	$	50,358	$	61,983

The tax effects of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to deferred income tax assets and liabilities, and their approximate tax effects, are as follows as of December 31, 2019 and 2018:



(In thousands)	2019			2018
Deferred tax assets:
Loans acquired	$	20,783		$	12,536
Allowance for loan losses	16,732			13,947
Valuation of foreclosed assets	2,626			1,474
Tax NOLs from acquisition	18,118			7,242
Deferred compensation payable	2,750			2,707
Accrued equity and other compensation	6,677			8,182
Acquired securities	3,393			397
Unrealized loss on available-for-sale securities	—			9,196
Right-of-use lease liability	10,221			—
Other	7,886			7,042
Gross deferred tax assets	89,186			62,723
Deferred tax liabilities:
Goodwill and other intangible amortization	(41,221		)	(30,471		)
Accumulated depreciation	(36,554		)	(13,361		)
Right-of-use lease asset	(10,176		)	—
Unrealized gain on available-for-sale securities	(3,720		)	—
Other	(7,651		)	(5,360		)
Gross deferred tax liabilities	(99,322		)	(49,192		)
Net deferred tax (liability) asset	$	(10,136	)	$	13,531

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below for the years ended December 31:



(In thousands)	2019			2018			2017
Computed at the statutory rate ⁽¹⁾	$	63,442		$	55,875		$	54,223
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit	5,860			5,015			1,582
Discrete items related to ASU 2016-09	(38		)	(2,439		)	(1,480		)
Tax exempt interest income	(4,390		)	(3,168		)	(4,209		)
Tax exempt earnings on BOLI	(852		)	(869		)	(926		)
Federal tax credits	(2,933		)	(3,003		)	(1,586		)
Impact of DTA remeasurement	—			—			11,471
Other differences, net	3,176			(1,053		)	2,908
Actual tax provision	$	64,265		$	50,358		$	61,983

_________________________

(1) The statutory rate was 21% for 2019 and 2018 compared to 35% for 2017.

The Company follows ASC Topic 740, Income Taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be 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 fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be 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 should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. ASC Topic 740 also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. The Company has no history of expiring net operating loss carryforwards and is projecting significant pre-tax and financial taxable income in future years. The Company expects to fully realize its deferred tax assets in the future.

Income tax expense was lower during 2018 than 2017 largely due to discrete tax benefits related to tax accounting for a cost segregation study, excess tax benefits related to restricted stock and a state tax deferred tax asset (“DTA”) adjustment. The purpose of the cost segregation study was to analyze the costs included in various projects and recognize the benefit of recording tax depreciation in 2017 when the federal rate was higher. The purpose of the state DTA adjustment was due to an analysis of projected state apportionment after the 2017 acquisitions of First South Bank, Bank SNB and Southwest Bank were merged into Simmons Bank in 2018.

On December 22, 2017, the President signed tax reform legislation (the “2017 Act”) which included a broad range of tax reform provisions affecting businesses, including corporate tax rates, business deductions, and international tax provisions. The 2017 Act reduced the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. Under US GAAP, deferred tax assets and liabilities are required to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled and the effect of a change in tax law is recorded discretely as a component of the income tax provision related to continuing operations in the period of enactment. As a result, the Company was required to remeasure its deferred taxes as of December 22, 2017 based upon the new 21% tax rate and the change was recorded in the 2017 income tax provision. The 2017 Act resulted in a one-time non-cash adjustment to income of $11.5 million in 2017.

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance on accounting for the tax effects of the 2017 Act. SAB 118 provided a measurement period that should not exceed one year from the 2017 Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. The Company’s financial results for the year ended December 31, 2017 reflected the income tax effects for the 2017 Act including several provisional amounts based on reasonable estimates. Any items that were estimated in 2017 were finalized in 2018 with no material impact to the company’s federal income tax expense.

In February 2018, FASB issued ASU No. 2018-2, Income Statement-Reporting Comprehensive Income (Topic 220) (“ASU 2018-2”), that allowed a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the 2017 Act. Previous US GAAP required the remeasurement of deferred tax assets and liabilities as a result of a change in tax laws or rates to be presented in net income from continuing operations. Consequently, the original deferred

tax amount recorded through AOCI at the old rate will remain in AOCI despite the fact that its related deferred tax asset/liability will be reduced through continuing operations to reflect the new rate, resulting in “stranded” tax effects in AOCI. ASU 2018-2 required a reclassification from AOCI to retained earnings for those stranded tax effects resulting from the newly enacted federal corporate income tax rate. As permitted, the Company elected to early adopt the provisions of ASU 2018-2 during the fourth quarter 2017, which resulted in a reclassification from AOCI to retained earnings in the amount of $3.0 million.

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.

Section 382 of the Internal Revenue Code imposes an annual limit on the ability of a corporation that undergoes an “ownership change” to use its U.S. net operating losses to reduce its tax liability. The Company has engaged in two tax-free reorganization transactions in which acquired net operating losses are limited pursuant to Section 382. In total, approximately $84.0 million of federal net operating losses subject to the IRC Section 382 annual limitation are expected to be utilized by the Company, of which $52.1 million is related to the Reliance acquisition that closed during second quarter 2019. All of the acquired Reliance net operating losses are expected to be fully utilized by 2027, with the remaining acquired net operating loss carryforwards expected to be fully utilized by 2036.

The Company files income tax returns in the U.S. federal jurisdiction. The Company’s U.S. federal income tax returns are open and subject to examinations from the 2016 tax year and forward. The Company’s various state income tax returns are generally open from the 2016 and later tax return years based on individual state statute of limitations.