13.   Income Taxes

 

The components of income tax expense (benefit) for the years ended December 31, 2017, 2016 and 2015 consisted of:

In October, 2015, the Company created Bankwell Loan Servicing Group, Inc., a Passive Investment Company (“PIC”) organized for state income tax purposes. The PIC is a wholly-owned subsidiary of the Bank operating in accordance with Connecticut statutes. The PIC’s activities are limited in scope to holding and managing loans that are collateralized by real estate. Income earned by a PIC is determined in accordance with the statutory requirements for a passive investment company and the dividends paid by the PIC to the Bank are not taxable income for Connecticut income tax purposes. As a result of the formation of the PIC, the Bank no longer expects to be subject to Connecticut income taxes. State taxes are being recognized for income taxes on income earned in other states.

On December 22, 2017 the Tax Cuts and Jobs Act of 2017 was signed into law. As a result, the corporate tax rate was reduced from 35% to 21%. Companies are required to recognize the effect of tax law changes in the period of enactment in accordance with GAAP. As result of the tax law changes the Company recognized a write-down of its deferred tax asset in the amount of  $3.3 million.

A reconciliation of the anticipated income tax expense, computed by applying the statutory federal income tax rate of 35% to the income before income taxes, to the amount reported in the consolidated statements of income for the years ended December 31, 2017, 2016 and 2015 was as follows:

At December 31, 2017 and 2016, the components of deferred tax assets and liabilities were as follows:

A valuation allowance against deferred tax assets is required if, based on the weight of available evidence, it is more-likely-than-not that some or all of the deferred tax assets will not be realized. Management evaluated its remaining deferred tax assets and believes no valuation allowances are needed at December 31, 2017.

At December 31, 2017, the Company had federal net operating loss carryovers of  $2.6 million. The carryovers were transferred to the Company upon the merger with The Wilton Bank. The losses will expire after 2032 and are subject to certain annual limitations which amount to $176 thousand per annum.

Management regularly analyzes their tax positions and at December 31, 2017 management has established a reserve for uncertain tax positions in conjunction with our out of state lending activity and for a potential tax liability as a result of the Company’s deferred compensation plan established for the board of directors. The total reserve for uncertain tax positions totaled $393 thousand as of December 31, 2017. The tax years 2014 and subsequent, are subject to examination by federal and state taxing authorities. The statute of limitations has expired on the years before 2014. No examinations are currently in process.

The following table reflects a reconciliation of the beginning and ending balances of the Company’s uncertain tax positions: