Federal and State Income Taxes
The Tax Act was enacted on December 22, 2017 and resulted in a decrease in the federal marginal tax rate from 35 percent to 21 percent beginning in 2018. As a result of the Tax Act, the Company incurred a one-time tax expense adjustment of $19,699,000 during 2017 due to the Company’s revaluation of its net deferred tax assets. This adjustment is reflected in the following tables.
The following table is a summary of consolidated income tax expense:
|
| | | | | | | | | |
| Years ended |
(Dollars in thousands) | December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
Current | | | | | |
Federal | $ | 29,555 |
| | 30,461 |
| | 28,705 |
|
State | 9,183 |
| | 9,283 |
| | 9,374 |
|
Total current income tax expense | 38,738 |
| | 39,744 |
| | 38,079 |
|
Deferred 1 | | | | | |
Federal | 22,246 |
| | (70 | ) | | (3,451 | ) |
State | 3,641 |
| | (12 | ) | | (629 | ) |
Total deferred income tax expense (benefit) | 25,887 |
| | (82 | ) | | (4,080 | ) |
Total income tax expense | $ | 64,625 |
| | 39,662 |
| | 33,999 |
|
______________________________
| |
1 | Includes tax benefit of operating loss carryforwards of $644,000, $571,000 and $391,000 for the years ended December 31, 2017, 2016, and 2015, respectively. |
Combined federal and state income tax expense differs from that computed at the federal statutory corporate tax rate as follows:
|
| | | | | | | | |
| Years ended |
| December 31,
2017 | | December 31,
2016 | | December 31,
2015 |
Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State taxes, net of federal income tax benefit | 4.6 | % | | 3.8 | % | | 3.7 | % |
Tax rate change | 10.9 | % | | — | % | | — | % |
Tax-exempt interest income | (10.5 | )% | | (12.2 | )% | | (12.6 | )% |
Tax credits | (3.2 | )% | | (2.1 | )% | | (3.0 | )% |
Other, net | (1.1 | )% | | 0.2 | % | | (0.5 | )% |
Effective tax rate | 35.7 | % | | 24.7 | % | | 22.6 | % |
Note 15. Federal and State Income Taxes (continued)
The tax effect of temporary differences which give rise to a significant portion of deferred tax assets and deferred tax liabilities are as follows:
|
| | | | | | |
(Dollars in thousands) | December 31,
2017 | | December 31,
2016 |
Deferred tax assets | | | |
Allowance for loan and lease losses | $ | 32,890 |
| | 50,172 |
|
Deferred compensation | 5,640 |
| | 8,320 |
|
Other real estate owned | 5,126 |
| | 8,309 |
|
Acquisition fair market value adjustments | 4,139 |
| | 4,763 |
|
Net operating loss carryforwards | 2,841 |
| | 4,737 |
|
Employee benefits | 2,615 |
| | 3,927 |
|
Interest rate swap agreements | 2,379 |
| | 5,705 |
|
Other | 3,673 |
| | 5,569 |
|
Total gross deferred tax assets | 59,303 |
| | 91,502 |
|
Deferred tax liabilities | | | |
Deferred loan costs | (5,854 | ) | | (8,061 | ) |
Intangibles | (4,161 | ) | | (5,477 | ) |
Depreciation of premises and equipment | (2,863 | ) | | (3,111 | ) |
FHLB stock dividends | (2,602 | ) | | (3,976 | ) |
Available-for-sale securities | (1,707 | ) | | (1,036 | ) |
Debt modification costs | (1,591 | ) | | — |
|
Other | (2,181 | ) | | (2,720 | ) |
Total gross deferred tax liabilities | (20,959 | ) | | (24,381 | ) |
Net deferred tax asset | $ | 38,344 |
| | 67,121 |
|
The Company has federal net operating loss carryforwards of $10,635,000 expiring between 2030 and 2035. The Company has Colorado net operating loss carryforwards of $13,987,000 expiring between 2031 and 2032. The net operating loss carryforwards originated from bank acquisitions. The Company has federal tax credit carryforwards with no expiration dates of $411,000.
The Company and the Bank file consolidated income tax returns in the following jurisdictions: federal, Montana, Idaho, Utah, Colorado and Arizona. Although the Bank has operations in Wyoming and Washington, neither Wyoming nor Washington imposes a corporate-level income tax. All required income tax returns have been timely filed. The following schedule summarizes the years that remain subject to examination as of December 31, 2017:
|
| |
| Years ended December 31, |
Federal | 2013, 2014, 2015 and 2016 |
Montana | 2014, 2015 and 2016 |
Idaho | 2014, 2015 and 2016 |
Utah | 2014, 2015 and 2016 |
Colorado | 2013, 2014, 2015 and 2016 |
Arizona | 2013, 2014, 2015 and 2016 |
Note 15. Federal and State Income Taxes (continued)
The Company had no unrecognized income tax benefits as of December 31, 2017 and 2016. The Company recognizes interest related to unrecognized income tax benefits in interest expense and penalties are recognized in other expense. Interest expense and penalties recognized with respect to income tax liabilities for the years ended December 31, 2017, 2016, and 2015 was not significant. The Company had no accrued liabilities for the payment of interest or penalties at December 31, 2017 and 2016.
The Company has assessed the need for a valuation allowance and determined that a valuation allowance was not necessary at December 31, 2017 and 2016. The Company believes that it is more-likely-than-not that the Company’s deferred tax assets will be realizable by offsetting future taxable income from reversing taxable temporary differences and anticipated future taxable income (exclusive of reversing temporary differences). In its assessment, the Company considered its strong earnings history, no history of income tax credit carryforwards expiring unused, and no future net operating losses (for tax purposes) are expected.