Entity information:

Note 14 — Income Taxes

The Tax Cut and Jobs Act (the “Tax Act”) enacted in December 2017 reduced the federal corporate marginal income tax rate from 35% to 21% effective January 1, 2018. As a result of the Tax Act, we recorded a $14.6 million reduction in the value of our net deferred tax asset, which was recorded as additional income tax expense in the fourth quarter of 2017 and which increased significantly the effective tax rate for the year ended December 31, 2017. We reported net deferred tax assets of $28.8 million and $48.2 million at December 31, 2017 and 2016, respectively, which related primarily to our allowance for credit losses, and loan origination fees. Adjustments may be made in future periods to these estimates as we continue to obtain, prepare and analyze information about facts and circumstances that existed as of the enactment date of the 2017 Tax Act, if known, would have affected the income tax effects reported as provisional amounts until the filling of the 2017 tax returns which is expected in the third quarter of 2018. Management believes it is more likely than not that all of the deferred tax assets will be realized. Federal and state income tax expense consists of the following for the years ended December 31:

 

(dollars in thousands)   2017   2016   2015  
Current federal income tax expense   $ 59,019   $ 53,290   $ 46,758  
Current state income tax expense   7,511   13,733   11,020  
Total current tax expense   66,530   67,023   57,778  
               
Deferred federal income tax expense (benefit)   18,459   (5,523 ) (6,642 )
Deferred state income tax expense (benefit)   515   (105 ) (87 )
Total deferred tax expense (benefit)   18,974   (5,628 ) (6,729 )
               
Total income tax expense   $ 85,504   $ 61,395   $ 51,049  

 

Temporary timing differences between the amounts reported in the financial statements and the tax bases of assets and liabilities result in deferred taxes. The accounting for the changes in tax law resulted in stranded tax effects within accumulated other comprehensive income for items that were originally recognized in other comprehensive income rather than in net income. The FASB recently issued an accounting standard update allowing companies to reclassify stranded tax effects resulting from the Tax Act from accumulated other comprehensive income to retained earnings. The table below summarizes significant components of our deferred tax assets and liabilities utilizing federal corporate income tax rates of 21% as of December 31, 2017 and 35% as of December 31, 2016 and 2015:

 

(dollars in thousands)   2017   2016   2015  
Deferred tax assets              
Allowance for credit losses   $ 16,568   $ 23,738   $ 21,191  
Deferred loan fees and costs   6,741   10,728   9,724  
Deferred rent   1,009   1,483   1,364  
Stock-based compensation   847   3,037   2,068  
Net operating loss   2,032   2,695   2,946  
Unrealized loss on securities available-for-sale   1,312   1,303   —  
Unrealized loss on interest rate swap derivatives   —   284   —  
SERP   1,373   2,088   1,776  
Premises and equipment   33   3,838   3,381  
Other   35   477   383  
Total deferred tax assets   29,950   49,671   42,833  
               
Deferred tax liabilities              
Unrealized net gain on securities available for sale   —   —   (694 )
Unrealized gain on interest rate swap derivatives   (578 ) —   —  
Excess servicing   (99 ) (191 ) (157 )
Intangible assets   (503 ) (1,260 ) (1,671 )
Total deferred tax liabilities   (1,180 ) (1,451 ) (2,522 )
Net deferred income tax amount   $ 28,770   $ 48,220   $ 40,311  

 

A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate for the years ended December 31 follows:

 

    2017   2016   2015  
               
Statutory federal income tax rate   35.00 % 35.00 % 35.00 %
Increase (decrease) due to              
State income taxes   3.41   5.57   5.26  
Deferred tax adjustment related to Tax Act   7.85   —   —  
Tax exempt interest and dividend income   (0.61 ) (0.98 ) (1.25 )
Stock-based compensation expense   0.01   0.01   0.02  
Other   0.38   (1.01 ) (1.28 )
Effective tax rates   46.04 % 38.59 % 37.75 %

 

The Company is currently estimating that its effective tax rate for 2018 will be in the range of 25% to 26% however, that estimated effective tax rate is subject to change as further authoritative interpretation and guidance regarding the Tax Act becomes available. The net operating loss carry forward of $718 thousand acquired in conjunction with the Fidelity acquisition, is subject to annual limits under Section 382 of the Internal Revenue Code and expires in 2027. The Company remains subject to examination for the years ending after December 31, 2013.