18. Income Taxes

 

Income tax expense for 2017 was impacted by the adjustment of our deferred tax assets and liabilities related to the reduction in the U.S. federal statutory income tax rate to 21% under the Tax Cuts and Jobs Act, which was enacted on December 22, 2017. As a result of the new law, which is more fully discussed below, the Company recognized a net tax expense of $154,000.

The components of income tax expense are as follows:

 

		Years Ended December 31
		2017			2016			2015
		(In Thousands)
Current:
Federal		$	14,588		$	13,125		$	11,299
State and local			181			244			146
Deferred			1,261			(615)			(35)
Tax reform revaluation			154			-			-
		$	16,184		$	12,754		$	11,410

 

The effective tax rates differ from federal statutory rate applied to income before income taxes due to the following:

 

		Years Ended December 31
		2017			2016			2015
		(In Thousands)
Tax expense at statutory rate (35%)		$	16,958		$	14,559		$	13,240
Increases (decreases) in taxes from:
State income tax – net of federal tax benefit			119			159			95
Tax exempt interest income, net of TEFRA			(1,218)			(1,168)			(1,219)
Bank owned life insurance			(1,212)			(341)			(255)
Captive insurance			(364)			(414)			(415)
BOLI surrender			1,721			-			-
Tax reform revaluation			154			-			-
Other			26			(41)			(36)
Totals		$	16,184		$	12,754		$	11,410

 

Deferred federal income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of First Defiance’s deferred federal income tax assets and liabilities are as follows:

 

		December 31
		2017			2016
		(In Thousands)
Deferred federal income tax assets:
Allowance for loan losses		$	5,415		$	9,059
Postretirement benefit costs			671			1,044
Deferred compensation			1,354			1,847
Impaired loans			1,432			1,087
Accrued vacation			123			454
Allowance for real estate held for sale losses			71			226
Deferred loan origination fees and costs			332			462
Accrued bonus			333			626
Other			1,578			1,554
Total deferred federal income tax assets			11,309			16,359
Deferred federal income tax liabilities:
FHLB stock dividends			1,558			2,279
Goodwill			4,377			5,967
Mortgage servicing rights			2,060			3,358
Fixed assets			1,039			1,217
Other intangible assets			990			301
Loan mark to market			5			59
Net unrealized gains on available-for-sale securities			194			272
Prepaid expenses			539			694
Other			316			-
Total deferred federal income tax liabilities			11,078			14,147
Net deferred federal income tax asset/ (liability)		$	231		$	2,212

 

The realization of the Company’s deferred tax assets is dependent upon the Company’s ability to generate taxable income in future periods and the reversal of deferred tax liabilities during the same period and the ability to carryback any losses. The Company has evaluated the available evidence supporting the realization of its deferred tax assets and determined it is more likely than not that the assets will be realized and thus no valuation allowance was required at December 31, 2017.

 

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (In Thousands):

 

Balance at January 1, 2015		$	-
Additions based on tax positions related to the current year			-
Additions for tax positions of prior years			-
Reductions for tax positions of prior years			-
Reductions due to the statute of limitations			-
Settlements			-
Balance at December 31, 2015		$	-
Balance at January 1, 2016		$	-
Additions based on tax positions related to the current year			-
Additions for tax positions of prior years			398
Reductions for tax positions of prior years			-
Reductions due to the statute of limitations			-
Settlements			-
Balance at December 31, 2016		$	398
Balance at January 1, 2017		$	398
Additions based on tax positions related to the current year			-
Additions for tax positions of prior years			-
Reductions for tax positions of prior years			-
Reductions due to the statute of limitations			-
Settlements			(398)
Balance at December 31, 2017		$	-

 

The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

 

 

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in the state of Indiana. The Company is no longer subject to examination by taxing authorities for years before 2014. The Company currently operates primarily in the states of Ohio and Michigan, which tax financial institutions based on their equity rather than their income.

 

Tax Cuts and Jobs Act – The Tax Cuts and Jobs Act was enacted on December 22, 2017. Among other things, the new law (i) establishes a new, flat corporate federal statutory income tax rate of 21%, (ii) eliminates the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any taxable year, (iii) limits the deduction for net interest expense incurrent by U.S. corporations, (iv) allows businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets, (v) eliminates or reduces certain deductions related to meals and entertainment expenses, (vi) modifies the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee and (vii) limits the deductibility of deposit insurance premiums. The Tax Cuts and Jobs Act also significantly changes U.S. tax law related to foreign operations, however, such changes do not impact First Defiance.

 

As stated above, as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, First Defiance re-measured its deferred tax assets and liabilities based upon the newly enacted U.S. statutory federal income tax rate of 21%, which is the tax rate at which these assets and liabilities are expected to reverse in the future. First Defiance recognized a net tax expense related to the re-measurement of its deferred tax assets and liabilities totaling $154,000.