(16.) INCOME TAXES
The income tax expense for the years ended December 31 consisted of the following (in thousands):
| 2017 | 2016 | 2015 | ||||||
| Current tax expense (benefit): | ||||||||
| Federal | $ | (3,031 | ) | $ | 13,846 | $ | 8,720 | |
| State | 573 | 82 | 21 | |||||
| Total current tax expense | (2,458 | ) | 13,928 | 8,741 | ||||
| Deferred tax expense (benefit): | ||||||||
| Federal | 12,297 | (2,175 | ) | 1,440 | ||||
| State | 106 | 457 | 358 | |||||
| Total deferred tax expense (benefit) | 12,403 | (1,718 | ) | 1,798 | ||||
| Total income tax expense | $ | 9,945 | $ | 12,210 | $ | 10,539 |
Income tax expense differed from the statutory federal income tax rate for the years ended December 31 as follows:
| 2017 | 2016 | 2015 | ||||
| Statutory federal tax rate | 35.0 | % | 35.0 | % | 35.0 | % |
| Increase (decrease) resulting from: | ||||||
| Tax exempt interest income | (5.6 | ) | (5.6 | ) | (6.1 | ) |
| Tax credits and adjustments | (6.7 | ) | 0.3 | (0.7 | ) | |
| Non-taxable earnings on company owned life insurance | (1.4 | ) | (2.2 | ) | (1.8 | ) |
| State taxes, net of federal tax benefit | 1.1 | 0.8 | 0.7 | |||
| Nondeductible expenses | 0.3 | 0.2 | 0.3 | |||
| Goodwill and contingent consideration adjustments | 0.3 | (0.9 | ) | (0.3 | ) | |
| Other, net | (0.1 | ) | 0.1 | - | ||
| Effective tax rate | 22.9 | % | 27.7 | % | 27.1 | % |
Total income tax expense (benefit) was as follows for the years ended December 31 (in thousands):
| 2017 | 2016 | 2015 | ||||||
| Income tax expense | $ | 9,945 | $ | 12,210 | $ | 10,539 | ||
| Shareholder's equity | 3,909 | (1,649 | ) | (1,456 | ) |
The Company recognizes deferred income taxes for the estimated future tax effects of differences between the tax and financial statement bases of assets and liabilities considering enacted tax laws. These differences result in deferred tax assets and liabilities, which are included in other assets in the Company's consolidated statements of condition. The Company also assesses the likelihood that deferred tax assets will be realizable based on, among other considerations, future taxable income and establishes, if necessary, a valuation allowance for those deferred tax assets determined to not likely be realizable. A deferred tax asset valuation allowance is recognized if, based on the weight of available evidence (both positive and negative), it is more likely than not that some portion or all of the deferred tax assets will not be realized. The future realization of deferred tax benefits depends upon the existence of sufficient taxable income within the carry-back and carry-forward periods. Management's judgment is required in determining the appropriate recognition of deferred tax assets and liabilities, including projections of future taxable income.
The Company's net deferred tax asset (liability) is included in other assets in the consolidated statements of condition. The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows at December 31 (in thousands):
| 2017 | 2016 | ||||
| Deferred tax assets: | |||||
| Allowance for loan losses | $ | 8,741 | $ | 11,938 | |
| Deferred compensation | 748 | 1,357 | |||
| Investment in limited partnerships | 599 | 943 | |||
| SERP agreements | 320 | 682 | |||
| Interest on nonaccrual loans | 305 | 453 | |||
| Share-based compensation | 464 | 604 | |||
| Net unrealized loss on securities available for sale | 1,334 | 2,326 | |||
| Other | 66 | 120 | |||
| Gross deferred tax assets | 12,577 | 18,423 | |||
| Deferred tax liabilities: | |||||
| REIT dividend | 9,412 | - | |||
| Prepaid expenses | 720 | - | |||
| Prepaid pension costs | 3,255 | 4,727 | |||
| Intangible assets | 2,594 | 4,059 | |||
| Depreciation and amortization | 2,023 | 1,085 | |||
| Loan servicing assets | 250 | 415 | |||
| Other | 102 | 234 | |||
| Gross deferred tax liabilities | 18,356 | 10,520 | |||
| Net deferred tax asset (liability) | $ | (5,779 | ) | $ | 7,903 |
In March 2014, the New York legislature approved changes in the state tax law that was phased-in over two years, beginning in 2015. The primary changes that impacted the Company included the repeal of the Article 32 franchise tax on banking corporations ("Article 32A") for 2015, expanded nexus standards for 2015 and a reduction in the corporate tax rate for 2016. The repeal of Article 32A and the expanded nexus standards lowered our taxable income apportioned to New York in 2016 and 2015 compared to 2014. In addition, the New York state income tax rate was reduced from 7.1% to 6.5% in 2016.
On December 22, 2017, the TCJ Act was signed into law which, among other items, reduces the federal statutory corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. The TCJ Act also contains other provisions that may affect the Company currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation, accelerated expensing of depreciable property for assets placed into service after September 27, 2017 and before 2023, limits the deductibility of net interest expenses, eliminates the corporate alternative minimum tax, limits net operating loss carrybacks and carryforwards to 80% of taxable income and other provisions.
Results for the fourth quarter and full year of 2017 were positively impacted by a $2.9 million reduction in income tax expense due to the TCJ Act, primarily driven by a revaluation adjustment to the net deferred tax liability.
Based upon the Company's historical and projected future levels of pre-tax and taxable income, the scheduled reversals of taxable temporary differences to offset future deductible amounts, and prudent and feasible tax planning strategies, management believes it is more likely than not that the deferred tax assets will be realized. As such, no valuation allowance has been recorded as of December 31, 2017 or 2016.
The Company and its subsidiaries are primarily subject to federal and New York income taxes. The federal income tax years currently open for audits are 2013 through 2017. The New York income tax years currently open for audits are 2013 through 2017.
At December 31, 2017, the Company had no federal or New York net operating loss or tax credits carryforwards.
The Company's unrecognized tax benefits and changes in unrecognized tax benefits were not significant as of or for the years ended December 31, 2017, 2016 and 2015. There were no material interest or penalties recorded in the income statement in income tax expense for the years ended December 31, 2017, 2016 and 2015. As of December 31, 2017 and 2016, there were no amounts accrued for interest or penalties related to uncertain tax positions.