Note 19 Income Taxes

 

Income tax expense attributable to income before taxes was $21.3 million, $2.9 million and $3.0 million for 2017, 2016 and 2015, respectively. During the fourth quarter of 2017, the Company re-measured its deferred tax asset as a result of the enactment of “H.R.1”, known as the “Tax Cuts and Jobs Act”, which among other items reduces the federal corporate tax rate to 21% effective January 1, 2018. Income tax expense recorded in 2017 included an $18.5 million non-cash one-time charge primarily related to this re-measurement. The re-measurement was based on reasonable estimates using information that was known and available from the Tax Cuts and Jobs Act as it related to our temporary differences. As additional details and technical corrections arise related to the Tax Cuts and Jobs Act, the re-measurement estimates may be subject to future adjustment.

 

(a) Income taxes

 

Total income taxes for 2017, 2016 and 2015 were allocated as follows:

 

 

(b) Tax Rate Reconciliation

 

The reconciliation between the income tax expenses and the amounts computed by applying the U.S. federal income tax rate to pretax income is as follows:

 

 

(c) Significant Components of Deferred Taxes

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below:

 

 

At December 31, 2017, the Company has federal and state net operating loss carryovers (NOLs) of $4.0 million and $8.9 million, respectively, which are available to offset future taxable income. The federal NOLs expire in varying amounts through 2037, and the state NOLs expire in varying amounts between 2026 and 2037. The Company also has a minimum tax credit carryover of $5.9 million that under the recently enacted tax law, the minimum tax credit is available to reduce income tax obligations in future periods without limitation and eventually becomes refundable regardless of the Company’s tax liability. The minimum tax credit is available to reduce income tax obligations in future periods to the extent they exceed the calculated alternative minimum tax. The Company does not expect any tax attribute carryovers to expire before they are utilized.

 

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, if any (including the impact of available carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. For the years ended December 31, 2017 and 2016, management believes a valuation allowance on the deferred tax asset is not necessary based on the current and future projected earnings of the Company. The Company has no ASC 740-10 unrecognized tax benefits recorded as of December 31, 2017 and 2016 and does not expect the total amount of unrecognized tax benefits to significantly increase within the next 12 months. The Company and its subsidiary bank are subject to income tax by federal, state and local government taxing authorities. The Company’s tax returns for the years ended December 31, 2014 through 2017 remain subject to examination for U.S. federal income tax authorities. The years open to examination by state and local government authorities vary by jurisdiction.

 

The Company has unvested stock-based compensation awards outstanding at December 31, 2017, including stock options, restricted stock and performance stock units. The strike prices for options range from $18.09 to $34.16, with a large portion of the awards having strike prices of $20.00. The restricted stock vest over a range of 1-3 year period. The performance stock units cliff vest over a range of 2-3 years and the number of shares issued is determined by the final performance results. Depending on the movement in our stock price, these stock-based compensation awards may create either an excess tax benefit or tax deficiency depending on the relationship between the fair value at the time of vesting or exercise and the estimated fair value recorded at the time of grant. During 2017 and 2016, the Company recorded $4.2 million and $2.1 million, respectively, of excess tax benefit related to the settlement of awards during the period as a component of income tax expense in the consolidated statements of operations. During 2015, the Company recorded a tax deficiency of $3.7 million in income tax expense resulting from expired or exercised awards. As of December 31, 2017, the Company had a $3.1 million deferred tax asset related to stock-based compensation, $2.3 million of which is associated with executive officers still employed by the Company.