8. INCOME TAXES
Allocation of federal and state income taxes between current and deferred portions is as follows:
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (In thousands) | ||||||||||||
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Current tax provision: |
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Federal |
$ | 20,575 | $ | 15,989 | $ | 11,109 | ||||||
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State |
6,089 | 4,708 | 3,218 | |||||||||
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Total current provision |
26,664 | 20,697 | 14,327 | |||||||||
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Deferred tax provision (benefit): |
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Federal |
(16 | ) | (2,176 | ) | (1,841 | ) | ||||||
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State |
(219 | ) | (640 | ) | (520 | ) | ||||||
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Effect of tax rate change |
7,058 | — | — | |||||||||
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Total deferred provision (benefit) |
6,823 | (2,816 | ) | (2,361 | ) | |||||||
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Total tax provision |
$ | 33,487 | $ | 17,881 | $ | 11,966 | ||||||
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The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:
| Years Ended December 31, |
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| 2017 | 2016 | 2015 | ||||||||||
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Statutory federal tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
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Increase (decrease) resulting from: |
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State taxes, net of federal tax benefit |
5.0 | 5.1 | 4.8 | |||||||||
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Dividends received deduction |
(0.3 | ) | (0.7 | ) | (1.1 | ) | ||||||
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Bank-owned life insurance |
(1.3 | ) | (0.8 | ) | (1.2 | ) | ||||||
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Tax exempt income |
(4.2 | ) | (5.9 | ) | (6.0 | ) | ||||||
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Effect of tax rate change |
9.2 | — | — | |||||||||
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Other, net |
0.4 | 1.6 | 1.2 | |||||||||
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Effective tax rates |
43.8 | % | 34.3 | % | 32.7 | % | ||||||
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The components of the net deferred tax asset are as follows:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
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Deferred tax assets: |
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Federal |
$ | 12,353 | $ | 19,275 | ||||
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State |
5,795 | 5,482 | ||||||
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| 18,148 | 24,757 | |||||||
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Deferred tax liabilities |
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Federal |
(2,329 | ) | (2,625 | ) | ||||
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State |
(575 | ) | (671 | ) | ||||
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| (2,904 | ) | (3,296 | ) | |||||
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Net deferred tax asset |
$ | 15,244 | $ | 21,461 | ||||
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The tax effects of each item that give rise to deferred tax assets and deferred tax liabilities are as follows:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
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Deferred tax assets: |
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Allowance for loan losses |
$ | 12,701 | $ | 16,401 | ||||
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Employee benefit and retirement plans |
3,720 | 5,011 | ||||||
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Acquisition accounting |
1,378 | 2,135 | ||||||
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Non-accrual interest |
82 | 1,091 | ||||||
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Other |
259 | 208 | ||||||
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| 18,140 | 24,846 | |||||||
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Deferred tax liabilities |
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Net unrealized gain on securities available for sale |
(292 | ) | (1,444 | ) | ||||
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Depreciation and amortization |
(945 | ) | (1,289 | ) | ||||
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Other |
(1,659 | ) | (652 | ) | ||||
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| (2,896 | ) | (3,385 | ) | |||||
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Net deferred tax asset |
$ | 15,244 | $ | 21,461 | ||||
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The Company reduces deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is not “more likely than not” that some portion or all of the deferred tax assets will be realized. The Company assesses the realizability of its deferred tax assets by assessing the likelihood of the Company generating federal and state tax income, as applicable, in future periods in amounts sufficient to offset the deferred tax charges in the periods they are expected to reverse. Based on this assessment, management concluded that a valuation allowance was not required as of December 31, 2017, 2016 and 2015.
The federal income tax reserve for loan losses at the Company’s base year is $9.8 million. If any portion of the reserve is used for purposes other than to absorb loan losses, approximately 150% of the amount actually used (limited to the amount of the reserve) would be subject to taxation in the year in which used. As the Company intends to use the reserve to absorb only loan losses, a deferred tax liability of $2.8 million has not been provided.
The Company’s income tax returns are subject to review and examination by federal and state taxing authorities. The Company is currently open to audit under the applicable statutes of limitations by the Internal Revenue Service for the years ended December 31, 2014 through 2017. The years open to examination by state taxing authorities vary by jurisdiction; no years prior to 2014 are open.
On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the “Act”). The Act includes a number of changes in existing law impacting businesses including, among other things, a permanent reduction in the corporate income tax rate from 35% to 21%, effective on January 1, 2018. As a result of this rate reduction, the Company revalued its net deferred tax asset as of December 22, 2017 resulting in a reduction in the value of the net deferred tax assets of $7.1 million, which was recorded as additional income tax expense in the Company’s consolidated statement of net income in 2017. The Company believes it has developed a reasonable estimate of other provisions of the Act in determining the current year income tax provision.