Note 13: Income Taxes

 

Federal and state income tax expense consists of the following for the years ended:

 

		December 31,
(in thousands)		2017			2016			2015
Current federal income tax		$	3,243		$	4,171		$	3,998
Current state income tax			1,038			(6)			(15)
Deferred federal income tax			(968)			(1,153)			(2,832)
Deferred state income tax			(161)			(76)			(178)
Total income tax expense		$	3,152		$	2,936		$	973

 

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

 

		December 31,
(in thousands)		2017			2016			2015
Statutory federal income tax rate			34.0	%		34.0	%		34.0	%
State income taxes, net of federal income tax expense			5.6			6.2			5.9
Bank owned life insurance			(2.5)			(2.6)			(6.5)
Acquisition related costs			1.1			-			10.7
Revalue of deferred taxes			2.6			-			-
Correction of error			(6.5)			-			-
Other, net			(3.9)			(2.0)			1.9
Effective tax rate			30.4	%		35.6	%		46.0	%

 

Income tax expense for 2017 was impacted by the adjustment of the Company’s deferred tax assets and liabilities related to the reduction in the U.S. federal statutory income tax rate to 21% under the Act. As a result of the new law, which is more fully discussed below, we recognized a net tax expense totaling $215 thousand. Income tax expense for 2017 was also impacted by a correction of an overstatement of taxes that resulted from incorrectly classifying certain acquired loan fair value adjustments on purchased credit impaired loans. As a result the Company recognized tax benefits totaling $622 thousand related to the 2015 through 2016 tax years.

 

The following table is a summary of the tax effect of temporary differences that give rise to a significant portion of deferred tax assets and liabilities:

 

		December, 31
(in thousands)		2017			2016
Deferred tax assets:
Net operating loss		$	700		$	1,115
Allowance for credit losses			1,695			2,180
Valuation on foreclosed real estate			851			1,053
Supplemental executive benefit plans			372			519
Stock-based compensation			74			32
Deferred loan fees and costs, net			15			48
Unrealized loss on securities			124			84
Other assets			282			467
Total deferred tax assets			4,113			5,498
Deferred tax liabilities:
Acquisition activity			2,443			4,327
Fair value			629			1,264
Depreciation and amortization			229			267
Total deferred tax liabilities			3,301			5,858
Net deferred tax assets (liabilities)		$	812		$	(360)

 

 

Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act was enacted on December 22, 20 I 7. 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 tax net operating loss carryforwards to offset regular tax liability for any taxable year, (iii) limits the deduction for net interest expense incurred 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 Act also significantly changes U.S. tax law related to foreign operations, however, such changes do not currently impact us.

 

As stated above, as a result of the enactment of the Tax Cuts and Job Act on December 22, 2017, we remeasured our 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 assets and liabilities are expected to reverse in the future. Notwithstanding the foregoing, we are still analyzing certain aspects of the new law and refining our calculation, which could affect the measurement of these assets and liabilities or give rise to new deferred tax amounts. Nonetheless, we recognized a tax expense related to the remeasurement of our deferred tax asset and liabilities totaling $215 thousand.