INCOME TAXES
The components of the income tax provision for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In Thousands) |
Current income tax provision: | | | | | |
Federal | $ | 4,641 |
| | $ | 5,215 |
| | $ | 2,865 |
|
State | 215 |
| | 153 |
| | 5 |
|
Total current income tax provision | 4,856 |
| | 5,368 |
| | 2,870 |
|
| | | | | |
Deferred income tax provision (benefit): | |
| | |
| | |
|
Federal | 3,513 |
| | (444 | ) | | (766 | ) |
Total deferred income tax provision (benefit) | 3,513 |
| | (444 | ) | | (766 | ) |
Total income tax provision | $ | 8,369 |
| | $ | 4,924 |
| | $ | 2,104 |
|
A reconciliation of the anticipated income tax provision, based on the statutory tax rate of 34.0%, to the income tax provision as reported in the consolidated statements of income is as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (Dollars in Thousands) |
Income tax provision at statutory tax rate | $ | 4,628 |
| | $ | 5,519 |
| | $ | 2,194 |
|
Increase (decrease) resulting from: | |
| | |
| | |
|
Bank-owned life insurance | (209 | ) | | (194 | ) | | (210 | ) |
Tax-exempt income | (326 | ) | | (195 | ) | | (52 | ) |
Compensation and employee benefit plans | 175 |
| | 164 |
| | 183 |
|
Nondeductible expenses | 10 |
| | 9 |
| | 9 |
|
Expired capital loss carryforward | — |
| | — |
| | 278 |
|
Tax credit | (56 | ) | | (56 | ) | | (56 | ) |
Change in valuation allowance | — |
| | — |
| | (300 | ) |
State taxes, net of federal tax benefit | 142 |
| | 101 |
| | 3 |
|
Effect of income tax rate change | 3,969 |
| | — |
| | — |
|
Other | 36 |
| | (424 | ) | | 55 |
|
Total income tax provision | $ | 8,369 |
| | $ | 4,924 |
| | $ | 2,104 |
|
| | | | | |
Effective tax rate | 61.5 | % | | 30.3 | % | | 32.6 | % |
The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities are presented below:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In Thousands) |
Deferred tax assets: | | | |
Allowance for loan losses | $ | 2,694 |
| | $ | 4,213 |
|
Unrealized losses on available for sale securities | 452 |
| | 598 |
|
Depreciation of premises and equipment | 1,912 |
| | 2,850 |
|
Deferred compensation | 3,265 |
| | 5,156 |
|
Employee benefit plans | 305 |
| | 466 |
|
Capital loss carry-forward | — |
| | 8 |
|
Interest receivable on nonaccrual loans | 18 |
| | 89 |
|
Deferred other real estate owned write-downs | 59 |
| | 32 |
|
Acquisition fair value adjustments | 191 |
| | 484 |
|
Other | 250 |
| | 306 |
|
Total deferred tax assets | 9,146 |
| | 14,202 |
|
| | | |
Deferred tax liabilities: | |
| | |
|
Unrealized gains on available for sale securities | 70 |
| | 247 |
|
Goodwill and other intangibles | 1,551 |
| | 2,632 |
|
Deferred loan costs | 896 |
| | 1,350 |
|
Mortgage servicing asset | 215 |
| | 309 |
|
Merger expenses and purchase adjustments | 2 |
| | 6 |
|
Total deferred tax liabilities | 2,734 |
| | 4,544 |
|
Deferred tax asset, net | $ | 6,412 |
| | $ | 9,658 |
|
Retained earnings at December 31, 2017 and 2016 included a contingency reserve for loan losses of $4.7 million, which represents the tax reserve balance existing at December 31, 1987, and is maintained in accordance with provisions of the Internal Revenue Code applicable to savings banks. Amounts transferred to the reserve have been claimed as deductions from taxable income, and, if the reserve is used for purposes other than to absorb losses on loans, a federal income tax liability could be incurred. It is not anticipated the Company will incur a federal income tax liability relating to this reserve balance, and accordingly, deferred income taxes of approximately $987,000 at December 31, 2017 and $1.6 million at December 31, 2016 have not been recognized.
Financial service companies doing business in Connecticut are permitted to establish a “passive investment company” (“PIC”) to hold and manage loans secured by real property. PICs are exempt from Connecticut corporation business tax, and dividends received by the financial services companies from PICs are not taxable. In January 1999, the Bank established a PIC, as a wholly-owned subsidiary, and in June 2000, transferred a portion of its residential and commercial mortgage loan portfolios from the Bank to the PIC. A substantial portion of the Company’s interest income is now derived from the PIC, an entity whose net income is exempt from State of Connecticut taxes, and accordingly, state income taxes are minimal. The Bank’s ability to continue to realize the tax benefits of the PIC is subject to the PIC continuing to comply with all statutory requirements related to the operations of the PIC. Accordingly, no Connecticut-related deferred tax assets or liabilities have been recorded.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are expected to be deductible, management believes its deferred tax asset is more likely than not realizable.
With limited exception, the Company is no longer subject to United States federal, state and local income tax examinations by the tax authorities for the years prior to 2014.