NOTE I - INCOME TAXES:
Deferred taxes (or deferred charges) as of December 31, 2017, 2016 and 2015, included in other assets, were as follows (in thousands):
| December 31, | 2017 | 2016 | 2015 | |||||||||
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Deferred tax assets: |
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Allowance for loan losses |
$ | 1,292 | $ | 1,858 | $ | 2,744 | ||||||
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Employee benefit plans’ liabilities |
3,048 | 4,784 | 4,633 | |||||||||
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Unrealized loss on available for sale securities, charged from equity |
627 | 1,013 | ||||||||||
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Loss on credit impairment of securities |
356 | 576 | 576 | |||||||||
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Earned retiree health benefits plan liability |
1,012 | 1,638 | 1,638 | |||||||||
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General business and AMT credits |
1,489 | 1,605 | 2,011 | |||||||||
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Tax net operating loss carryforward |
1,891 | 3,423 | 2,514 | |||||||||
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Other |
992 | 1,731 | 1,535 | |||||||||
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Valuation allowance |
(7,934 | ) | (11,560 | ) | (10,106 | ) | ||||||
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Deferred tax assets |
2,773 | 5,068 | 5,545 | |||||||||
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Deferred tax liabilities: |
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Unrealized gain on available for sale securities, charged to equity |
180 | |||||||||||
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Unearned retiree health benefits plan asset |
202 | 720 | 734 | |||||||||
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Bank premises and equipment |
2,359 | 4,011 | 4,369 | |||||||||
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Other |
212 | 337 | 262 | |||||||||
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Deferred tax liabilities |
2,773 | 5,068 | 5,545 | |||||||||
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Net deferred taxes |
$ | $ | $ | |||||||||
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Income taxes consist of the following components (in thousands):
| Years Ended December 31, | 2017 | 2016 | 2015 | |||||||||
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Current |
$ | (1,080) | $ | 78 | $ | |||||||
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Deferred: |
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Federal |
4,023 | (247) | (2,728) | |||||||||
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Change in valuation allowance |
(4,023) | 247 | 1,966 | |||||||||
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Total deferred |
(762) | |||||||||||
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Totals |
$ (1,080) | $ | 78 | $ | (762) | |||||||
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Income taxes amounted to less than the amounts computed by applying the U.S. Federal income tax rate of 34.0% for 2017, 2016 and 2015 to income (loss) before income taxes. The reasons for these differences are shown below (in thousands):
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
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| Tax | Rate | Tax | Rate | Tax | Rate | |||||||||||||||||||
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Taxes computed at statutory rate |
$ | 571 | 34 | $ | 83 | 34 | $ | (1,820) | (34) | |||||||||||||||
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Increase (decrease) resulting from: |
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Tax-exempt interest income |
(362) | (22) | (417) | (170) | (447) | (8) | ||||||||||||||||||
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Income from BOLI |
(302) | (18) | (144) | (59) | (166) | (3) | ||||||||||||||||||
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Federal tax credits |
(298) | (18) | (298) | (121) | (298) | (6) | ||||||||||||||||||
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Other |
(656) | (39) | 607 | 247 | 3 | |||||||||||||||||||
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Impact of tax rate change |
3,990 | 238 | ||||||||||||||||||||||
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Change in valuation allowance for enacted change in tax rates |
(3,990) | (238) | ||||||||||||||||||||||
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Realization of AMT credit |
(742) | (44) | ||||||||||||||||||||||
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Other changes in valuation allowance |
709 | 42 | 247 | 101 | 1,966 | 37 | ||||||||||||||||||
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Total income tax (benefit) expense |
$ | (1,080) | (65) | $ | 78 | 32 | $ | (762) | (14) | |||||||||||||||
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During 2017, the Company recorded an income tax benefit of $1,080,000. On December 22, 2017, the President signed into law The Tax Cuts and Jobs Act (the “Act”). In addition to reducing U.S. corporate income tax rates from 34% to 21%, the Act repeals the alternative minimum tax (“AMT”) regime for tax years beginning after December 31, 2017. For tax years beginning in 2018, 2019 and 2020, the AMT credit carryforward can be utilized to offset regular tax with any remaining AMT carryforwards eligible for a refund of 50%. Any remaining AMT credit carryforwards will become fully refundable beginning in the 2021 tax year. As a result, the Company has reclassified the AMT credit carryforward to a tax receivable which resulted in a deferred tax benefit of $742,000. The Company also recorded a current tax benefit of $338,000 to account for the carryback of general business tax credits to open tax years.
The Company also remeasured the net deferred tax asset and corresponding valuation allowance as a result of the Act. The impact was to reduce the deferred tax asset and corresponding valuation allowance by $3,990,000.
A valuation allowance is recognized against deferred tax assets when, based on the consideration of all available positive and negative evidence using a more likely than not criteria, it is determined that all or a portion of these tax benefits may not be realized. This assessment requires consideration of all sources of taxable income available to realize the deferred tax asset including taxable income in prior carry-back years, future reversals of existing temporary differences, tax planning strategies and future taxable income exclusive of reversing temporary differences and carryforwards. The Company incurred losses on a cumulative basis for the three-year period ended December 31, 2014, which is considered to be significant negative evidence. The positive evidence considered in support was insufficient to overcome this negative evidence. As a result, the Company established a full valuation allowance for its net deferred tax asset in the amount of $8,140,000 as of December 31, 2014.
The Company intends to maintain this valuation allowance until it determines it is more likely than not that the asset can be realized through current and future taxable income. If not utilized, the Company’s federal net operating loss of $9,004,000 will begin to expire in 2034.
The Company has reviewed its income tax positions and specifically considered the recognition and measurement requirements of the benefits recorded in its financial statements for tax positions taken or expected to be taken in its tax returns. The Company currently has no unrecognized tax benefits that, if recognized, would favorably affect the income tax rate in future periods.
For the year ended December 31, 2015, the Company recorded a tax benefit of $762,000 in continuing operations and a corresponding income tax expense in other comprehensive income associated with the increase in unrealized gains on available for sale securities and the increase in the unrecognized gain related to the post-retirement benefit obligation in accordance with the intra-period tax allocation rules as outlined in Accounting Standards Codification Topic 740, Income Taxes.