Income Taxes
Income tax expense is substantially due to Federal income taxes as the provision for the state of Oregon income taxes is insignificant. Income tax expense for the years ended December 31, 2017, 2016 and 2015 consisted of the following:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
Current tax expense | | $ | 12,171 |
| | $ | 6,885 |
| | $ | 9,760 |
|
Deferred tax expense | | 6,185 |
| | 6,918 |
| | 4,058 |
|
Income tax expense | | $ | 18,356 |
| | $ | 13,803 |
| | $ | 13,818 |
|
A reconciliation of the Company's effective income tax rate with the Federal statutory income tax rate of 35% is as follows:
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
Income tax expense at Federal statutory rate | | $ | 21,051 |
| | $ | 18,452 |
| | $ | 17,957 |
|
Tax-exempt instruments | | (3,212 | ) | | (3,198 | ) | | (2,482 | ) |
Non-deductible acquisition costs | | 210 |
| | — |
| | — |
|
Federal tax credits and other benefits (1) | | (1,510 | ) | | (931 | ) | | (880 | ) |
Effects of BOLI | | (531 | ) | | (511 | ) | | (474 | ) |
Revaluation of net deferred tax assets | | 2,568 |
| | — |
| | — |
|
Tax resolutions (2) | | — |
| | — |
| | (300 | ) |
Other, net | | (220 | ) | | (9 | ) | | (3 | ) |
Income tax expense | | $ | 18,356 |
| | $ | 13,803 |
| | $ | 13,818 |
|
(1) Federal tax credits are provided for under the NMTC program and LIHTC programs as described in Note (14) Commitments and Contingencies. Tax benefits related to these credits were recognized for financial reporting purposes in the same period that the credits were recognized in the Company's income tax returns. Other benefits include the proportional amortization of the LIHTC of $2.2 million, $523,000 and $209,000, for the years ended December 31, 2017, 2016 and 2015, respectively.
(2) Washington Banking Company had recorded tax-related liabilities prior to the merger effective date, which the Company assumed as part of the Washington Banking Merger. These tax-related liabilities were resolved during the year ended December 31, 2015, resulting in a decrease of the Company's income tax expense for the year ended December 31, 2015.
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate. The corporate tax rate reduction was effective January 1, 2018. The Tax Act required a revaluation the Company’s deferred tax assets and liabilities to account for the future impact of lower corporate tax rates and other provisions of the legislation. As a result of the Company's revaluation, the net deferred tax asset was reduced through an increase to the provision for income tax.
The following table presents major components of the deferred income tax asset (liability) resulting from differences between financial reporting and tax basis:
|
| | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | (In thousands) |
Deferred tax assets: | | | | |
Allowance for loan losses | | $ | 3,330 |
| | $ | 4,739 |
|
Accrued compensation | | 1,779 |
| | 2,685 |
|
Stock compensation | | 660 |
| | 910 |
|
Net unrealized losses charged to other comprehensive income on securities | | 347 |
| | 1,388 |
|
Market discount on purchased loans | | 3,908 |
| | 10,506 |
|
Foregone interest on nonaccrual loans | | 471 |
| | 1,536 |
|
Net operating loss carryforward acquired from NCB | | 270 |
| | 483 |
|
Other deferred tax assets | | 763 |
| | 1,483 |
|
Total deferred tax assets | | 11,528 |
|
| 23,730 |
|
Deferred tax liabilities: | | | | |
Deferred loan fees, net | | (2,518 | ) | | (3,736 | ) |
Premises and equipment | | (1,091 | ) | | (1,660 | ) |
FHLB stock | | (557 | ) | | (926 | ) |
Goodwill and other intangible assets | | (304 | ) | | (740 | ) |
Federal tax credits | | (1,107 | ) | | (1,314 | ) |
Junior subordinated debentures | | (1,215 | ) | | (2,122 | ) |
Other deferred tax liabilities | | (847 | ) | | (1,223 | ) |
Total deferred tax liabilities | | (7,639 | ) |
| (11,721 | ) |
Deferred tax asset, net | | $ | 3,889 |
|
| $ | 12,009 |
|
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is required to be recognized for the portion of the deferred tax asset that will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. As of December 31, 2017, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management expects to realize the benefits of these deductible differences.
The Company had a net operating loss carryforward of $1.3 million and $1.4 million at December 31, 2017 and 2016, respectively, that will expire in 2033. The Company is limited to the amount of the net operating loss carryforward that it can deduct each year. A tax planning strategy has been developed that management believes will enable the Company to deduct all of the net operating loss carryforwards prior to the expiration date. Based on these estimates, management has not recorded a valuation allowance as of December 31, 2017 and 2016.
As of December 31, 2017 and 2016, the Company had an insignificant amount of unrecognized tax benefits, none of which would materially affect its effective tax rate if recognized. The Company does not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease in the next 12 months. The amount of interest and penalties accrued as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 were immaterial.
The Company has qualified under provisions of the Internal Revenue Code to compute income taxes after deductions of additions to the bad debt reserves when it was registered as a Savings Bank. At December 31, 2017, the Company had a taxable temporary difference of approximately $2.8 million that arose before 1988 (base-year amount). In accordance with FASB ASC 740, a deferred tax liability of an estimated $980,000 has not been recognized for the temporary difference. Management does not expect this temporary difference to reverse in the foreseeable future.
The Company and its subsidiary file a United States consolidated federal income tax return and an Oregon State income tax return, and the tax years subject to examination by the Internal Revenue Service are the years ended December 31, 2017, 2016, 2015 and 2014.