INCOME TAXES
The Tax Cuts and Jobs Act ("Tax Act) was signed into law on December 22, 2017. Included as part of the law was a permanent reduction in the Federal corporate income tax rate from 35% to 21% effective January 1, 2018. Based upon the change in the tax rate, the Corporation revalued its net deferred tax asset at December 31, 2017. As a result of the enactment of the Tax Act, the Corporation recognized an additional tax expense of $1.4 million for the year ended December 31, 2017.
The components of income tax expense are summarized as follows:
|
| | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
| (In thousands) |
Current tax expense | |
| | |
|
Federal | $ | 2,438 |
| | $ | 1,394 |
|
State | 919 |
| | 579 |
|
| 3,357 |
| | 1,973 |
|
Deferred tax expense | |
| | |
|
Federal | 1,555 |
| | 624 |
|
State | (128 | ) | | 175 |
|
Valuation allowance | (8 | ) | | (77 | ) |
| 1,419 |
| | 722 |
|
Total | $ | 4,776 |
| | $ | 2,695 |
|
The following table presents a reconciliation between the reported income taxes and the income taxes which would be computed by applying the normal federal income tax rate (34%) to income before income taxes:
|
| | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 |
| (In thousands) |
| | | |
Federal income tax | $ | 2,966 |
| | $ | 2,527 |
|
Add (deduct) effect of: | |
| | |
|
State income taxes, net of federal income tax effect | 606 |
| | 533 |
|
Nontaxable interest income | (129 | ) | | (153 | ) |
Effect of change in Federal statutory tax rate | 1,420 |
| | — |
|
Bank owned life insurance | (198 | ) | | (147 | ) |
Nondeductible expenses | (31 | ) | | 12 |
|
Change in valuation reserve | (8 | ) | | (77 | ) |
Out of period adjustment for state fixed asset basis | 150 |
| | — |
|
Effective federal income taxes | $ | 4,776 |
| | $ | 2,695 |
|
The tax effects of existing temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In thousands) |
Deferred tax assets: | |
| | |
|
Allowance for loan losses | $ | 2,455 |
| | $ | 3,157 |
|
Accrued compensation | 91 |
| | 83 |
|
Nonaccrual loan interest | 12 |
| | 3 |
|
Depreciation | 202 |
| | 340 |
|
Contribution carry forward | 2 |
| | 55 |
|
Restricted stock | — |
| | 55 |
|
Mortgage servicing rights | (5 | ) | | — |
|
Accrued contributions | 167 |
| | 144 |
|
Unrealized loss on securities available-for-sale | 498 |
| | 335 |
|
Alternate minimum tax | — |
| | 270 |
|
| 3,422 |
| | 4,442 |
|
Valuation reserve | (2 | ) | | (10 | ) |
| 3,420 |
| | 4,432 |
|
Deferred tax liabilities | |
| | |
|
OREO reserve | — |
| | 1 |
|
Other | — |
| | 4 |
|
| — |
| | 5 |
|
Net deferred tax assets | $ | 3,420 |
| | $ | 4,427 |
|
At December 31, 2017 and 2016, the Corporation has provided a valuation allowance relating to a state tax benefit of contribution carryforwards. Management has determined that it is more likely than not that it will not be able to realize this deferred tax benefit.
The Corporation has approximately $2.2 million of taxes paid in the carryback period that could be utilized against the deferred tax asset. The remaining $1.2 million of net deferred tax assets more likely than not will be utilized through future earnings.
There were no unrecognized tax benefits during the years or at the years ended December 31, 2017 and 2016 and management does not expect a significant change in unrecognized benefits in the next twelve months. There were no tax interest and penalties recorded in the income statement for the years ended December 31, 2017 and 2016. There were no tax interest and penalties accrued for the years ended December 31, 2017 and 2016.
The Corporation and its subsidiaries are subject to U.S. federal income tax as well as income tax of the States of New Jersey and New York.
The Corporation is no longer subject to examination by taxing authorities for years before 2015.