Income Taxes
The components of income tax expense for the years ended December 31, were calculated using the asset and liability method as follows: |
| | | | | | | | | | | | |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 |
Current tax expense: | | |
| | |
| | |
|
Federal | | $ | 8,222 |
| | $ | 8,178 |
| | $ | 6,808 |
|
State | | 2,271 |
| | 2,244 |
| | 1,712 |
|
Total current tax expense | | 10,493 |
| | 10,422 |
| | 8,520 |
|
Deferred tax (benefit)/ expense: | | | | | | |
Federal | | 5,646 |
| | (984 | ) | | (284 | ) |
State | | 89 |
| | (277 | ) | | (122 | ) |
Total deferred tax (benefit)/ expense | | 5,735 |
| | (1,261 | ) | | (406 | ) |
| | | | | | |
Total income tax expense | | $ | 16,228 |
| | $ | 9,161 |
| | $ | 8,114 |
|
The provision for income taxes differs from the amount computed by applying the statutory U.S. federal income tax rate of 35% for 2017, 2016 and 2015 to income before taxes as follows:
|
| | | | | | | | | | | | |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 |
Computed income tax expense at statutory rate | | $ | 12,467 |
| | $ | 9,769 |
| | $ | 8,492 |
|
State income taxes, net of federal tax benefit | | 1,534 |
| | 1,279 |
| | 1,034 |
|
Tax-exempt income, net of disallowance | | (1,665 | ) | | (1,559 | ) | | (1,226 | ) |
Bank-owned life insurance income, net | | (245 | ) | | (261 | ) | | (251 | ) |
Impact of change in federal statutory rate on deferred tax assets | | 4,761 |
| | — |
| | — |
|
Tax benefit from stock compensation | | (922 | ) | | — |
| | — |
|
Other | | 298 |
| | (67 | ) | | 65 |
|
Total income tax expense | | $ | 16,228 |
| | $ | 9,161 |
| | $ | 8,114 |
|
| | | | | | |
Effective income tax rate | | 45.6 | % | | 32.8 | % | | 33.4 | % |
The new federal tax bill enacted in December 2017 caused the Bank to revalue its net deferred tax assets based upon the lower rate at which they will be recovered. The value of the Company’s 2017 net deferred tax assets declined, due to the new lower federal tax rate, with the offset charged to Federal tax expense. This non-cash expense for the Company was approximately $4.8 million. The new federal tax bill will reduce the Bank’s federal tax rate in future periods, beginning in 2018, to 21% from its previous level of approximately 35%. Also in 2017, with the adoption of ASU 2016-09, related to employee share-based payment accounting, a tax benefit of approximately $922 thousand, associated with employee exercises and vesting of stock compensation, was recorded as a reduction of the Company's tax liability and income tax expense. Prior to 2017, the related tax benefits were recorded to additional paid-in-capital, and had no impact on the Company's income statements.
At December 31, the tax effects of each type of income and expense item that give rise to deferred taxes are as follows:
|
| | | | | | | | |
(Dollars in thousands) | | 2017 | | 2016 |
Deferred tax asset: | | |
| | |
|
Allowance for loan losses | | $ | 9,252 |
| | $ | 12,753 |
|
Depreciation | | 1,831 |
| | 3,463 |
|
Net unrealized loss on investment securities | | — |
| | 444 |
|
Other-than-temporary impairment on equity securities | | — |
| | 22 |
|
Supplemental employee retirement plans | | 667 |
| | 1,018 |
|
Non-accrual interest | | 460 |
| | 1,145 |
|
Stock-based compensation expense | | 608 |
| | 1,019 |
|
Other | | 323 |
| | 390 |
|
Total | | 13,141 |
| | 20,254 |
|
| | | | |
Deferred tax liability: | | |
| | |
|
Goodwill | | 1,590 |
| | 2,301 |
|
Net unrealized gains on investments securities | | 90 |
| | — |
|
Deferred origination costs | | 710 |
| | 933 |
|
Total | | 2,390 |
| | 3,234 |
|
| | | | |
Net deferred tax asset | | $ | 10,751 |
| | $ | 17,020 |
|
Deferred income taxes are recognized based on the expected future tax consequences of differences between the financial statement and tax basis of assets and liabilities, calculated using currently enacted tax rates. Management records net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making this determination, we consider all available positive and negative evidence, including recent financial operations and projected future taxable income. Management believes based upon positive historical and expected future earnings that it is more likely than not the Company will generate sufficient taxable income to realize the deferred tax asset existing at December 31, 2017. However, factors beyond management’s control, such as the general state of the economy, can affect future levels of taxable income and there can be no assurances that sufficient taxable income will be generated to fully realize the deferred tax assets in the future.
The Company paid total income taxes in 2017, 2016, and 2015 of $10.5 million, $10.9 million, and $7.6 million, respectively.
The Company did not have any unrecognized tax benefits accrued as income tax liabilities or receivables or as deferred tax items at December 31, 2017 or December 31, 2016.
The Company invests in qualified affordable housing projects as a limited partner. In 2017, the Company estimated approximately $71 thousand of Federal Low Income Housing tax credits to be recognized. In both 2016 and 2015, the Company recognized $71 thousand of Federal Low Income Housing tax credits. The Company anticipates that it will receive additional tax credits related to the Federal Low Income Housing Tax Credit program in the amount of $319 thousand which are expected to be realized over the next 5 years.