16. Income Taxes
The current and deferred components of income tax (benefit) expense for the years ended December 31, are as follows:
| 2017 | 2016 | 2015 | ||||||||||
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Current expense: |
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Federal |
$ | 3,628 | $ | 3,875 | $ | 3,393 | ||||||
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State |
412 | 439 | 399 | |||||||||
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Total current expense |
4,040 | 4,314 | 3,792 | |||||||||
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Deferred (benefit) expense: |
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Federal |
6,496 | (4,450 | ) | (3,098 | ) | |||||||
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State |
422 | (334 | ) | (161 | ) | |||||||
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Valuation Allowance |
— | 108 | — | |||||||||
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Total deferred expense (benefit) |
6,918 | (4,676 | ) | (3,259 | ) | |||||||
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Provision for income taxes |
$ | 10,958 | $ | (362 | ) | $ | 533 | |||||
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Income tax accounts included in other assets at December 31, are as follows:
| 2017 | 2016 | |||||||
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Currently receivable |
$ | 15,940 | $ | 633 | ||||
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Deferred income tax asset, net |
20,892 | 43,129 | ||||||
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Total |
$ | 36,832 | $ | 43,762 | ||||
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Differences between income tax (benefit) expense at the statutory federal income tax rate and total income tax expense are summarized as follows:
| 2017 | 2016 | 2015 | ||||||||||
| (dollars in thousands) | ||||||||||||
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Federal income tax expense at statutory rates |
$ | 11,308 | $ | 8,218 | $ | 8,008 | ||||||
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State income tax, net of federal income tax benefit |
550 | 69 | 157 | |||||||||
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Insurance income |
(371 | ) | (406 | ) | (375 | ) | ||||||
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Effect of tax-exempt interest |
(8,683 | ) | (8,259 | ) | (6,915 | ) | ||||||
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Net tax credit |
(341 | ) | (395 | ) | (460 | ) | ||||||
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Valuation allowance |
— | 108 | — | |||||||||
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Deferred tax remeasurement |
8,448 | — | — | |||||||||
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Other |
47 | 303 | 118 | |||||||||
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Total |
$ | 10,958 | $ | (362 | ) | $ | 533 | |||||
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Effective tax rate |
32.95 | % | (1.50 | )% | 2.30 | % | ||||||
The following table sets forth the Company’s gross deferred income tax assets and gross deferred income tax liabilities at December 31:
| 2017 | 2016 | |||||||
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Deferred income tax assets: |
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Allowance for loan losses |
$ | 7,855 | $ | 10,419 | ||||
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AMT credit |
— | 10,234 | ||||||
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Deferred compensation |
7,555 | 9,684 | ||||||
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Pension and SERP liability |
8,436 | 11,320 | ||||||
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Unrealized losses on securities transferred to held-to-maturity |
1,303 | 3,161 | ||||||
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Depreciation |
631 | 968 | ||||||
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Accrued bonus |
— | 612 | ||||||
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Unrealized (gains) losses on securities available-for-sale |
14 | 357 | ||||||
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Charitable contributions carryforward |
442 | 266 | ||||||
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Acquisition premium |
17 | 128 | ||||||
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Nonaccrual interest |
97 | 125 | ||||||
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Limited partnerships |
21 | 30 | ||||||
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Investments write down |
17 | 26 | ||||||
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Other |
173 | 220 | ||||||
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Gross deferred income tax asset |
26,561 | 47,550 | ||||||
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Valuation allowance |
(108 | ) | (108 | ) | ||||
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Gross deferred income tax asset, net of valuation allowance |
26,453 | 47,442 | ||||||
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Deferred income tax liabilities: |
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Pension asset (liability) |
(4,403 | ) | (3,662 | ) | ||||
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Deferred origination costs |
(481 | ) | — | |||||
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Prepaid expenses |
(248 | ) | — | |||||
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Mortgage servicing rights |
(429 | ) | (651 | ) | ||||
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Gross deferred income tax liability |
(5,561 | ) | (4,313 | ) | ||||
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Deferred income tax asset, net |
$ | 20,892 | $ | 43,129 | ||||
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Based on the Company’s historical and current pre-tax earnings, management believes it is more likely than not that the Company will realize the deferred income tax asset existing at December 31, 2017, with the exception of a $108,000 valuation allowance on a charitable contribution carryforward that has a remaining carryforward period of 3-4 years. Management believes that existing net deductible temporary differences which give rise to the deferred tax asset will reverse during periods in which the Company generates net taxable income. In addition, gross deductible temporary differences are expected to reverse in periods during which offsetting gross taxable temporary differences are expected to reverse. Factors beyond management’s control, such as the general state of the economy and real estate values, can affect future levels of taxable income, and no assurance can be given that sufficient taxable income will be generated to fully absorb gross deductible temporary differences.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The majority of the provisions of the Tax Act takes effect on January 1, 2018. The Tax Act lowers the Company’s federal tax rate from 34% to 21%. The Company evaluated its deferred taxes at 21% as of the enactment date and recorded additional tax expense of $8,448,000. Also, for tax years beginning after December 31, 2017, the corporate Alternative Minimum Tax (“AMT”) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the alternative minimum tax credit carryforward will be recovered in tax years beginning before 2022. The Tax 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, the dividend received deduction and net operating loss carryforwards.
The Company is in an Alternative Minimum Tax (“AMT”) credit position. As the AMT has been repealed and the existing credit is refundable, the AMT credit, totalling $14,001,000, has been reclassified to currently receivable. The Company and its subsidiaries file a consolidated federal tax return. The Company is subject to federal and state examinations for tax years after December 31, 2013.