INCOME TAXES
The amount reflected as income taxes represents federal and state income taxes on financial statement income. Certain items of income and expense, primarily the provision for possible loan losses, allowance for losses on foreclosed assets held for resale, depreciation, and accretion of discounts on investment securities are reported in different accounting periods for income tax purposes.
The provisions for income taxes for the years ended December 31, were as follows:
|
| | | | | | | | | | | | |
(Dollars in thousands) | | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Federal | | $ | 2,635 |
| | $ | 4,885 |
| | $ | 2,830 |
|
State | | 771 |
| | 1,197 |
| | 591 |
|
| | $ | 3,406 |
| | $ | 6,082 |
| | $ | 3,421 |
|
Deferred expense (benefit) | | |
| | |
| | |
|
Federal | | $ | 1,268 |
| | $ | 665 |
| | $ | (371 | ) |
State | | 81 |
| | 42 |
| | (24 | ) |
| | 1,349 |
| | 707 |
| | (395 | ) |
Income tax expense (benefit) | | $ | 4,755 |
| | $ | 6,789 |
| | $ | 3,026 |
|
Income tax expense for 2017 was impacted by the adjustment of the Company's deferred tax asset related to the reduction in U.S. federal statutory income tax rate to 21% under the Tax Reform Act, which was signed into law on December 22, 2017. The Company was required to revalue its net deferred tax asset to this lower rate, resulting in a income tax charge of $646 thousand.
Following is a reconciliation of income taxes at federal statutory rates to recorded income taxes for the year ended December 31:
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| | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
(Dollars in thousands) | | Amount | | % | | Amount | | % | | Amount | | % |
Tax at Federal tax rate | | $ | 4,369 |
| | 34 | % | | $ | 6,689 |
| | 34 | % | | $ | 3,346 |
| | 34 | % |
Tax effect of: | | | | | | |
| | |
| | |
| | |
|
State income tax | | 771 |
| | 6.0 | % | | 1,197 |
| | 6.0 | % | | 246 |
| | 2.5 | % |
Tax exempt earnings | | (1,031 | ) | | (6.4 | )% | | (1,097 | ) | | (5.5 | )% | | (566 | ) | | (5.8 | )% |
Impact of deferred tax rate change | | $ | 646 |
| | 5.0 | % | | $ | — |
| | — | % | | $ | — |
| | — | % |
| | $ | 4,755 |
| | 38.6 | % | | $ | 6,789 |
| | 34.5 | % | | $ | 3,026 |
| | 30.7 | % |
Deferred tax assets and liabilities are the result of timing differences in recognition of revenue and expense for income tax and financial statement purposes. As a result of the Tax Reform Act signed into law on December 22, 2017, deferred taxes as of December 31, 2017 are based on the newly enacted U.S. statutory federal income tax rate of 21%. Deferred taxes as of December 31, 2016 are based on the previously enacted U.S. statutory federal income tax rate of 34%.
Deferred income tax assets and (liabilities) were comprised of the following at December 31:
|
| | | | | | | | |
(Dollars in thousands) | | 2017 | | 2016 |
Allowance for loan losses | | $ | 2,798 |
| | $ | 2,641 |
|
Minimum pension liability | | 1,342 |
| | 1,786 |
|
Unrealized loss on securities available-for-sale | | 2 |
| | 1,066 |
|
Gross deferred tax assets | | 4,142 |
| | 5,493 |
|
| | | | |
Depreciation | | (1,137 | ) | | (1,352 | ) |
Pension | | (21 | ) | | (6 | ) |
Goodwill | | (1,523 | ) | | (465 | ) |
Gross deferred tax liabilities | | (2,681 | ) | | (1,823 | ) |
| | | | |
Net deferred tax asset | | $ | 1,461 |
| | $ | 3,670 |
|
No deferred income tax valuation allowance is provided since it is more likely than not that realization of the deferred income tax asset will occur in future years.
Among other things, the new tax 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.
As stated above, as a result of the enactment of the Tax Reform Act on December 22, 2017, the Company remeasured its net deferred tax asset based upon the newly enacted U.S. statutory federal income tax rate of 21%, which is the tax rate at which this asset is expected to reverse in the future. Notwithstanding the foregoing, the Company is still analyzing certain aspects of the new law and refining its calculations, which could affect the measurement of these assets and liabilities or give rise to new deferred tax amounts. Nonetheless, the Company recognized an income tax charge of $646 thousand in 2017. The remeasurement of the deferred tax asset related to items that are charged or credited directly to AOCI was a component of 2017 income tax expense and recognized in continuing operations as required by ASC Topic 740.
The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. With limited exception, the Company’s federal and state income tax returns for taxable years through 2014 have been closed for purposes of examination by the federal and state taxing jurisdictions.