Income Taxes
Income taxes for the years ended December 31, 2017, 2016 and 2015 are summarized as follows:
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
(in thousands) | | | | | |
Current: | | | | | |
Federal tax expense | $ | 7,289 |
| | $ | 7,410 |
| | $ | 6,147 |
|
State tax expense | 2,435 |
| | 2,303 |
| | 372 |
|
Deferred: | | | | | |
Deferred income tax expense | 744 |
| | (2,853 | ) | | 1,300 |
|
Excess tax benefit from share-based award activity | (92 | ) | | — |
| | — |
|
Total income tax provision | $ | 10,376 |
| | $ | 6,860 |
| | $ | 7,819 |
|
The income tax provision for the year ended December 31, 2017 was more than, and the income tax provision for the years ended December 31, 2016 and 2015 were less than, the amounts computed by applying the maximum effective federal income tax rate of 35% to the income before income taxes for such years because of the following items:
|
| | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
(dollars in thousands) | Amount | | % of Pretax Income | | Amount | | % of Pretax Income | | Amount | | % of Pretax Income |
Expected provision | $ | 10,176 |
| | 35.0 | % | | $ | 9,538 |
| | 35.0 | % | | $ | 11,528 |
| | 35.0 | % |
Tax-exempt interest | (3,182 | ) | | (10.9 | ) | | (3,011 | ) | | (11.0 | ) | | (2,817 | ) | | (8.6 | ) |
Bank-owned life insurance | (485 | ) | | (1.7 | ) | | (477 | ) | | (1.8 | ) | | (438 | ) | | (1.3 | ) |
State income taxes, net of federal income tax benefit | 1,307 |
| | 4.5 |
| | 1,257 |
| | 4.6 |
| | 333 |
| | 1.0 |
|
Non-deductible acquisition expenses | — |
| | — |
| | 83 |
| | 0.3 |
| | 691 |
| | 2.1 |
|
General business credits | (466 | ) | | (1.6 | ) | | (537 | ) | | (2.0 | ) | | (1,225 | ) | | (3.7 | ) |
Federal income tax rate change | 3,212 |
| | 11.1 |
| | — |
| | — |
| | — |
| | — |
|
Other | (186 | ) | | (0.7 | ) | | 7 |
| | 0.1 |
| | (253 | ) | | (0.8 | ) |
Total income tax provision | $ | 10,376 |
| | 35.7 | % | | $ | 6,860 |
| | 25.2 | % | | $ | 7,819 |
| | 23.7 | % |
Net deferred tax assets as of December 31, 2017 and 2016 consisted of the following components:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
(in thousands) | | | |
Deferred income tax assets: | | | |
Allowance for loan losses | $ | 7,311 |
| | $ | 8,585 |
|
Deferred compensation | 1,344 |
| | 1,982 |
|
Net operating losses (state net operating loss carryforwards) | 4,131 |
| | 3,838 |
|
Unrealized losses on investment securities | 928 |
| | 738 |
|
Other real estate owned | 175 |
| | 283 |
|
Deferred loan fees | 143 |
| | — |
|
Other | 1,777 |
| | 3,012 |
|
Gross deferred tax assets | 15,809 |
| | 18,438 |
|
| | | |
Deferred income tax liabilities: | | | |
Premises and equipment depreciation and amortization | 2,604 |
| | 4,092 |
|
Federal Home Loan Bank stock | 91 |
| | 137 |
|
Purchase accounting adjustments | 1,179 |
| | 2,352 |
|
Mortgage servicing rights | 603 |
| | 766 |
|
Prepaid expenses | 523 |
| | 289 |
|
Deferred loan fees | — |
| | 225 |
|
Other | 153 |
| | 216 |
|
Gross deferred tax liabilities | 5,153 |
| | 8,077 |
|
Net deferred income tax asset | 10,656 |
| | 10,361 |
|
Valuation allowance | 4,131 |
| | 3,838 |
|
Net deferred tax asset | $ | 6,525 |
| | $ | 6,523 |
|
The Tax Act was signed into law on December 22, 2017. The Tax Act has a significant impact on the U.S. corporate income tax regime by lowering the U.S. corporate tax rate from 35 percent to 21 percent effective for taxable years beginning on or after January 1, 2018 in addition to implementing numerous other changes. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.
As a result of the Tax Act, the Company remeasured its deferred tax assets and deferred tax liabilities during the fourth quarter of 2017, resulting in additional income tax expense of $3.2 million.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance regarding how a company is to reflect provisional amounts when necessary information is not yet available, prepared or analyzed sufficiently to complete its accounting for the effect of the changes in the Tax Act. The income tax expense of $3.2 million recorded during the fourth quarter of 2017 represents all known and estimable impacts of the Tax Act and is a provisional amount based on the Company’s current best estimate. This provisional amount incorporates assumptions made based upon the Company’s current interpretations of the Tax Act and may change as the Company receives additional clarification and implementation guidance, and as data becomes available allowing for a more accurate scheduling of the deferred tax assets and liabilities, including those related to items potentially impacted by the Tax Act such as fixed assets and employee compensation. Adjustments to this provisional amount through December 22, 2018 will be included in income from operations as an adjustment to tax expense in future periods.
The Company has recorded a deferred tax asset for the future tax benefits of Iowa net operating loss carryforwards. The Iowa net operating loss carryforwards amounting to approximately $51.2 million will expire in various amounts from 2018 to 2038. As of December 31, 2017 and 2016, the Company believed it was more likely than not that all temporary differences associated with the Iowa corporate tax return would not be fully realized. Accordingly, the Company has recorded a valuation allowance to reduce the net operating loss carryforward. A valuation allowance related to the remaining deferred tax assets has not been provided because management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.
The Company had no material unrecognized tax benefits as of December 31, 2017 and 2016.