NOTE 12 – INCOME TAXES
A reconciliation of the income tax expense for the years ended December 31, 2017, 2016 and 2015 to the “expected” tax expense, which was computed by applying the statutory federal income tax rate of 35 percent for 2017, 2016 and 2015 to income before income tax expense, is as follows:
| 2017 | 2016 | 2015 | ||||||||||
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Computed “expected” tax expense |
$ | 16,321 | $ | 13,931 | $ | 8,785 | ||||||
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Increase (reduction) in tax expense resulting from: |
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State tax expense, net of federal tax effect |
333 | 805 | 1,031 | |||||||||
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Effect of statutory rate changes enacted (1) |
5,323 | — | — | |||||||||
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Non-deductible merger costs |
19 | 114 | 20 | |||||||||
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Incentive stock options |
429 | 152 | 58 | |||||||||
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Bank owned life insurance |
(286 | ) | (227 | ) | (214 | ) | ||||||
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Tax-exempt interest income, net of expense |
(2,585 | ) | (1,801 | ) | (703 | ) | ||||||
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Insurance premiums |
(347 | ) | (364 | ) | — | |||||||
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Excess tax benefit from exercise of stock options and vesting of restricted stock |
(728 | ) | (911 | ) | — | |||||||
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Other |
52 | 47 | 44 | |||||||||
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Income tax expense |
$ | 18,531 | $ | 11,746 | $ | 9,021 | ||||||
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| (1) | On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), resulting in significant modifications to existing law. As a result of the changes under the Tax Act, the Company recorded incremental income tax expense of $5,323 during the year ended December 31, 2017, which consisted primarily of the remeasurement of deferred tax assets and liabilities at the new federal statutory rate of 21%. Prior to the enactment of the Tax Act, deferred tax assets and liabilities were measured at the previous federal statutory rate of 35%. |
Income tax expense (benefit) was as follows:
| 2017 | 2016 | 2015 | ||||||||||
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Current expense |
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Federal |
$ | 13,653 | $ | 11,416 | $ | 8,302 | ||||||
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State |
1,093 | 1,294 | 1,777 | |||||||||
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Deferred expense |
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Federal |
(957 | ) | (908 | ) | (867 | ) | ||||||
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State |
(581 | ) | (56 | ) | (191 | ) | ||||||
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Deferred tax revaluation expense |
5,323 | — | — | |||||||||
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Income tax expense |
$ | 18,531 | $ | 11,746 | $ | 9,021 | ||||||
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The sources of deferred income tax assets (liabilities) at December 31, 2017 and 2016 and the tax effect is as follows:
| 2017 | 2016 | |||||||
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Deferred tax assets: |
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Organizational and start-up costs |
$ | 64 | $ | 115 | ||||
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Allowance for loan losses |
5,367 | 6,340 | ||||||
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Unrealized loss on securities |
2,403 | 4,826 | ||||||
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Net operating loss carry forward |
2,317 | 4,332 | ||||||
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Purchase accounting fair value adjustments |
1,006 | 1,914 | ||||||
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Accrued other expenses |
567 | 512 | ||||||
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Nonaccrual loan interest |
355 | 468 | ||||||
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Loan fees |
511 | 312 | ||||||
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Other |
552 | 139 | ||||||
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Total deferred tax asset |
13,142 | 18,958 | ||||||
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Deferred tax liabilities: |
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Mortgage servicing rights |
$ | (933 | ) | $ | (1,429 | ) | ||
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Premises and equipment |
(753 | ) | (1,080 | ) | ||||
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Prepaid expenses |
(469 | ) | (527 | ) | ||||
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Purchase accounting fair value adjustments |
(264 | ) | (639 | ) | ||||
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Mortgage banking derivatives |
— | (8 | ) | |||||
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Other |
(716 | ) | (262 | ) | ||||
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Total deferred tax liability |
(3,135 | ) | (3,945 | ) | ||||
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Net deferred tax asset |
$ | 10,007 | $ | 15,013 | ||||
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At December 31, 2017, the federal net operating loss remaining from the acquisition of MidSouth Bank totaled $11.0 million, which will expire at various dates from 2025 to 2031. The federal net operating losses that can be utilized are subject to an annual limitation of $1.3 million. Deferred tax assets are recognized for net operating losses because the benefit is more likely than not to be realized.
The Company does not have any uncertain tax positions and did not have any interest and penalties recorded in the income statement for the years ended December 31, 2017, 2016 and 2015. The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of Tennessee. The Company is no longer subject to examination by taxing authorities for years before 2014.