Entity information:
Note
10.
Income Taxes
 
Following is a summary of
the components of the federal and state income tax expense (benefit) for each of the years in the
three
-year period ended
December 
31,
 
2017.
 
(In thousands)
  
Year ended December 31,
  
   
2017
    
2016
    
2015
  
Current:
                        
Federal
   $
252
      
12
      
313
  
State
    
365
      
84
      
(38
 )
     
617
      
96
      
275
  
Deferred:
                        
Federal
    
2,067
      
983
      
789
  
State
    
191
      
128
      
294
  
     
2,258
      
1,111
      
1,083
  
                         
Income tax expense
  $
2,875
      
1,207
      
1,358
  
 
F
or each of the years in the
three
-year period ended
December 
31,
 
2017,
the difference between the federal statutory income tax rate and Patriot’s effective income tax rate reconciles as follows:
 
(In thousands)
  
Year ended December 31,
  
   
2017
    
2016
    
2015
  
                         
Income taxes at statutory Federal rate
   $
2,387
      
1,066
      
1,190
  
State taxes, net of Federal benefit
    
377
      
140
      
169
  
Nondeductible expenses
    
11
      
10
      
10
  
Deferred tax adjustment resulting from tax rate change
    
2,809
      
-
      
-
  
Benefit of change in Sec 382 classification
    
(2,774
 )    
-
      
-
  
Other
    
65
      
(9
 )    
(11
 )
Income tax expense
   $
2,875
      
1,207
      
1,358
  
 
The effective tax rate for each of the years in the
three
-year period ended
December
 
31,
 
2017
was
41.1%,
38.5%,
and
38.8%,
respectively.
 
The effective tax rate for the year ended
December 31, 2017
was
impacted by
two
significant and mostly offsetting items:
 
 
-
The provision increased by
$2.8
million as a result of a reduction in value of the Company
’s deferred tax asset due to a change in the Federal corporate tax rate to
21%
enacted in
December 2017.
 
 
-
In the same period, the income tax provision was reduced by
$2.8
million, as a result of the recognition of deferred tax benefits due to a change in the classification of certain net operating loss carryforwards that were previously deemed to have been subject to IRC section
382
limitations. The change in treatment from
one
acceptable tax method to another more beneficial tax method was recognized in the
fourth
quarter of
2017
in conjunction with the filing of amended tax returns for the
two
preceding years, and the completion of a
third
party study, which concluded it is more likely than
not
that the tax method change is in accordance with IRS regulations.
 
Deferred Tax Assets and Liabilities
 
The significant
components of Patriot’s net deferred tax assets at
December 
31,
 
2017
and
2016
are presented below.
 
(In thousands)
  
Year ended December 31,
  
   
2017
    
2016
  
Deferred tax assets (liabilities):
  
 
 
 
  
 
 
 
Federal NOL Carryforward Benefit
   $
7,810
      
15,590
  
NOL Write-off for Sec 382 Limit
    
(4,698
 )    
(10,382
 )
State NOL Carryforward Benefit
    
3,566
      
3,199
  
Allowance for Loan Loss
    
1,695
      
1,821
  
Non-accrual Interest
    
1,089
      
1,560
  
Share Based Compensation
    
157
      
200
  
Accrued Expenses
    
233
      
173
  
Federal AMT benefit
    
360
      
166
  
Depreciation of Premises and Equipment
    
52
      
161
  
Unrealized Loss AFS
    
68
      
76
  
OREO Write-down
    
41
      
63
  
Other
    
24
      
5
  
                 
Net deferred tax assets
   $
10,397
      
12,632
  
 
 
At
December
 
31,
 
2017,
the Bank had
$37.2
million of Federal net operating loss carryforwards (“NOLs”) and
$60.4
million of State NOLs to offset future taxable income. The NOLs expire over various periods beginning with tax year
2029
through tax year
2032.
 
Valuation Allowance against net Deferred Tax Assets
 
At
December 31, 2017
and
2016,
there was
no
need for a valuation allowance. Patriot management believes
no
valuation allowance is needed based on consideration of various factors including improvements in and historical and prospective results of operations, improvements in quality of the loan portfolio, general financial, economic and market data, and the period over which the NOLs are available to offset taxable income. Management continues to monitor circumstances to determine if it is more likely than
not
to realize the NOL benefits or if the valuation allowance
may
be required to be increased.