Income Taxes
ASC 740, “Income Taxes,” requires the affirmative evaluation that it is more likely than not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. Management has determined that there are no unrecognized tax benefits to be reported in the Corporation’s consolidated financial statements.
The Corporation utilizes the asset and liability method of accounting for income taxes whereby deferred tax assets are recognized for deductible temporary differences and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment. The provision for income taxes for the periods indicated consisted of the following:
|
| | | | | | | | | | | | | |
(In Thousands) | Year Ended June 30, |
2017 | | 2016 | | 2015 | |
| | | | | | |
Current: | | | | | | |
| Federal | $ | 1,718 |
| | $ | 3,801 |
| | $ | 5,365 |
| |
| State | 697 |
| | 1,354 |
| | 1,877 |
| |
| 2,415 |
| | 5,155 |
| | 7,242 |
| |
Deferred: | | | | | | |
| Federal | 937 |
| | 183 |
| | 17 |
| |
| State | 257 |
| | 34 |
| | 18 |
| |
| 1,194 |
| | 217 |
| | 35 |
| |
Provision for income taxes | $ | 3,609 |
| | $ | 5,372 |
| | $ | 7,277 |
| |
The Corporation's tax benefit from non-qualified equity compensation in fiscal 2017, 2016 and 2015 was $57,000, $222,000 and $397,000, respectively.
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to net income before income taxes as a result of the following differences for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended June 30, |
2017 | 2016 | 2015 |
(In Thousands) | Amount | | Tax
Rate | Amount | Tax
Rate | Amount | Tax
Rate |
| | | | | | | | | |
Federal income tax at statutory rate | $ | 2,988 |
| | 33.9 | % | $ | 4,496 |
| | 35.0 | % | $ | 5,892 |
| | 34.5 | % |
State income tax | 629 |
| | 7.1 | % | 902 |
| | 7.0 | % | 1,239 |
| | 7.3 | % |
Changes in taxes resulting from: | | | | | | | | | |
| Bank-owned life insurance | (57 | ) | | (0.7 | )% | (65 | ) | | (0.5 | )% | (65 | ) | | (0.4 | )% |
| Non-deductible expenses | 43 |
| | 0.5 | % | 45 |
| | 0.4 | % | 43 |
| | 0.3 | % |
| Non-deductible stock-based compensation | 6 |
| | 0.1 | % | (6 | ) | | (0.1 | )% | 139 |
| | 0.8 | % |
| Other | — |
| | — | % | — |
| | — | % | 29 |
| | 0.1 | % |
Effective income tax | $ | 3,609 |
| | 40.9 | % | $ | 5,372 |
| | 41.8 | % | $ | 7,277 |
| | 42.6 | % |
Deferred tax assets at June 30, 2017 and 2016 by jurisdiction were as follows:
|
| | | | | | | | |
(In Thousands) | June 30, |
2017 | | 2016 | |
| | | | |
Deferred taxes - federal | $ | 3,150 |
| | $ | 4,032 |
| |
Deferred taxes - state | 1,106 |
| | 1,357 |
| |
Total net deferred tax assets | $ | 4,256 |
| | $ | 5,389 |
| |
Net deferred tax assets at June 30, 2017 and 2016 were comprised of the following:
|
| | | | | | | | | |
(In Thousands) | June 30, |
2017 | | 2016 | |
| | | | |
Loss reserves | $ | 4,829 |
| | $ | 5,185 |
| |
Non-accrued interest | 668 |
| | 635 |
| |
Deferred compensation | 3,325 |
| | 3,535 |
| |
Accrued vacation | 293 |
| | 385 |
| |
Depreciation | 181 |
| | 41 |
| |
Other | 961 |
| | 644 |
| |
| Total deferred tax assets | 10,257 |
| | 10,425 |
| |
| | | | |
FHLB - San Francisco stock dividends | (956 | ) | | (956 | ) | |
Unrealized gain on derivative financial instruments, at fair value | (657 | ) | | (270 | ) | |
Unrealized gain on investment securities | (153 | ) | | (207 | ) | |
Unrealized gain on interest-only strips | (13 | ) | | (20 | ) | |
Deferred loan costs | (4,078 | ) | | (3,555 | ) | |
State tax | (144 | ) | | (28 | ) | |
| Total deferred tax liabilities | (6,001 | ) | | (5,036 | ) | |
| Net deferred tax assets | $ | 4,256 |
| | $ | 5,389 |
| |
The net deferred tax assets were included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition. The Corporation analyzes the deferred tax assets to determine whether a valuation allowance is required based on the more likely than not criteria that such assets will be realized principally through future taxable income. This criteria takes into account the actual earnings and the estimates of profitability. The Corporation may carryback net federal tax losses to the preceding five taxable years and forward to the succeeding 20 taxable years. At June 30, 2017 and 2016, the Corporation had no federal and state net tax loss carryforwards. Based on management's consideration of historical and anticipated future income before income taxes, as well as the reversal period for the items giving rise to the deferred tax assets and liabilities, a valuation allowance was not considered necessary at June 30, 2017 and 2016 and management believes it is more likely than not the Corporation will realize its deferred tax asset.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended June 30, 2017, 2016 and 2015 is as follows:
|
| | | | | | | | | | | | |
(In Thousands) | 2017 | 2016 | 2015 |
Balance of prior fiscal year end | $ | 1,961 |
| | $ | 1,961 |
| | $ | 1,961 |
| |
Additions based on tax positions related to the current year | — |
| | — |
| | — |
| |
Addition for tax positions of prior years | — |
| | — |
| | — |
| |
Reduction for tax positions of prior years | — |
| | — |
| | — |
| |
Settlements | — |
| | — |
| | — |
| |
Balance at June 30 | $ | 1,961 |
| | $ | 1,961 |
| | $ | 1,961 |
| |
Retained earnings at June 30, 2017 and 2016 includes approximately $9.0 million (pre-1988 bad debt reserve for tax purposes) for which federal income tax of $3.1 million has not been provided. If the amounts that qualify as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, including distribution in liquidation, they will be subject to federal income tax at the then-current corporate tax rate. If those amounts are not so used, they will not be subject to tax even in the event the Bank were to convert its charter from a thrift to a bank.
The Corporation files income tax returns for the United States and California jurisdictions. The Internal Revenue Service has audited the Bank’s income tax returns through 1996 and the California Franchise Tax Board has audited the Bank through 1990. Also, the Internal Revenue Service completed a review of the Corporation’s income tax returns for fiscal 2006 and 2007; and the California Franchise Tax Board completed a review of the Corporation’s income tax returns for fiscal 2009 and 2010. Fiscal years of 2014 and forward remain subject to federal examination, while the California state tax returns for fiscal years 2013 and forward are subject to examination by state taxing authorities.
It is the Corporation’s policy to record any penalties or interest charges arising from federal or state taxes as a component of income tax expense. For the fiscal years ended June 30, 2017, 2016 and 2015, there were no tax penalties or interest charges.