NOTE 10 – INCOME TAXES
Allocation of federal and state income taxes between current and deferred portions is as follows:
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Current tax provision: |
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Federal |
$ | 7,386 | $ | 7,212 | $ | 4,223 | ||||||
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State |
1,961 | 1,954 | 1,120 | |||||||||
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| 9,347 | 9,166 | 5,343 | ||||||||||
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Deferred tax expense (benefit): |
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Federal |
(71 | ) | (1,391 | ) | (799 | ) | ||||||
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State |
(20 | ) | (350 | ) | (222 | ) | ||||||
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Effect of change in statutory federal tax rate |
2,626 | — | — | |||||||||
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| 2,535 | (1,741 | ) | (1,021 | ) | ||||||||
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Total provision for income taxes |
$ | 11,882 | $ | 7,425 | $ | 4,322 | ||||||
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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, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
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Statutory federal tax rate |
35.0 | % | 35.0 | % | 34.0 | % | ||||||
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Increase (decrease) resulting from: |
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State taxes, net of federal tax benefit |
4.8 | 5.4 | 5.3 | |||||||||
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Bank-owned life insurance |
(1.5 | ) | (1.9 | ) | (2.7 | ) | ||||||
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Tax exempt income |
(0.6 | ) | (0.8 | ) | (0.3 | ) | ||||||
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Change in statutory federal tax rate |
10.0 | — | — | |||||||||
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Share based compensation |
(3.5 | ) | 1.2 | 1.9 | ||||||||
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Other, net |
1.0 | (0.6 | ) | 0.3 | ||||||||
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Effective tax rates |
45.2 | % | 38.3 | % | 38.5 | % | ||||||
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The components of the net deferred tax asset are as follows:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
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Deferred tax assets: |
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Employee benefit and deferred compensation plans |
$ | 2,375 | $ | 3,827 | ||||
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Allowance for loan losses |
4,596 | 5,577 | ||||||
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Accrued rent |
8 | 10 | ||||||
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Interest on non-performing loans |
34 | 50 | ||||||
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Stock options |
356 | 547 | ||||||
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Unrealized loss on securities available for sale |
15 | 1 | ||||||
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ESOP |
92 | 116 | ||||||
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Gross deferred tax assets |
7,476 | 10,128 | ||||||
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Deferred tax liabilities: |
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Mortgage servicing rights |
(240 | ) | (164 | ) | ||||
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Deferred loan origination costs |
(860 | ) | (1,104 | ) | ||||
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Restricted stock awards |
(280 | ) | (140 | ) | ||||
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Depreciation |
(201 | ) | (305 | ) | ||||
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Unrecognized retirement benefit |
(58 | ) | (72 | ) | ||||
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Other |
(43 | ) | (22 | ) | ||||
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Gross deferred tax liabilities |
(1,682 | ) | (1,807 | ) | ||||
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Net deferred tax asset |
$ | 5,794 | $ | 8,321 | ||||
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The Company does not have any uncertain tax positions at December 31, 2017 or 2016 which require accrual or disclosure. The Company records interest and penalties as part of income tax expense. No interest or penalties were recorded for the years ended December 31, 2017, 2016 and 2015.
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.
In prior years, the Company was allowed a special tax-basis bad debt deduction under certain provisions of the Internal Revenue Code. As a result, retained earnings of the Company as of December 31, 2017 and 2016 includes approximately $3.6 million for which federal and state income taxes have not been provided. If the Company no longer qualifies as a bank as defined in certain provisions of the Internal Revenue Code, this amount will be subject to recapture in taxable income ratably over four (4) years, subject to a combined federal and state tax rate of approximately 28%.
The Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act was enacted on December 22, 2017. Among other things, the new law (i) establishes a new, flat corporate federal statutory income tax rate of 21%, (ii) eliminates the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any taxable year, (iii) limits the deduction for net interest expense incurred by U.S. corporations, (iv) allows businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets, (v) eliminates or reduces certain deductions related to meals and entertainment expenses, (vi) modifies the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee and (vii) limits the deductibility of deposit insurance premiums. The Tax Cuts and Jobs Act also significantly changes U.S. tax law related to foreign operations, however, such changes do not currently impact us. As stated above, as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, the Company remeasured its deferred tax assets and liabilities based upon the newly enacted U.S. statutory federal income tax rate of 21%, which is the tax rate at which these assets and liabilities are expected to reverse in the future. As a result, the Company recorded a one-time charge of $2.63 million, recorded within income tax expense.