NOTE 7.              Income Taxes

 

The current and deferred amounts of the provision for income taxes expense (benefit) for the years ended December 31, 2017 and 2016 is as follows (in thousands):

 

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2017 and 2016 are as follows (in thousands):

 

 

The realizability of deferred tax assets is dependent upon a variety of factors, including the generation of future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities and tax planning strategies.  During 2017 and 2016, the Company sustained continued profitability, continued to pay taxes, and recognized deferred tax benefits.  Based upon these and other factors, management believes it is more likely than not that the Company will realize the benefits of these remaining deferred tax assets.  The net deferred tax asset is included in other assets on the Consolidated Balance Sheets.

 

The Tax Cut and Jobs Act that was signed into law on December 22, 2017 resulted in re-measurement of the Company’s deferred tax assets and liabilities at the new 21% federal tax rate compared to a 34% federal tax rate in 2016. The impact of the re-measurement is recorded as a component of income tax expense in the Consolidated Statements of Income for the year ended December 31, 2017.

 

Deferred tax assets related to securities available for sale losses that were revalued as of December 31, 2017 created a “stranded tax effect” in Accumulated Other Comprehensive Income (AOCI) due to the enactment of the Tax Cuts and Jobs Act. The issue arose due to the nature of U.S GAAP recognition of the effect on tax rate changes on the deferred tax assets related to securities available for sale. As mentioned above, the entirety of the revaluation was recorded as an adjustment to income tax provision. There was no corresponding impact to AOCI. In January 2018, the FASB issued ASU 2018-02 (see Note 18). The company early adopted the provisions of the ASU 2018-02 and recorded a one-time reclassification of $58 thousand from AOCI to retained earnings for stranded tax effects resulting from the newly enacted corporate tax rate. The amount of the reclassificaiton was the difference between the 34% historical corporate tax rate and the newly enacted 21% corporate tax rate. See Statement of Changes in Stockholders’ Equity for details of the reclassification.

 

A reconciliation between the amount of the effective income tax expense and the income tax expense that would have been provided at the federal statutory rate of 34% is shown below (in thousands):

 

 

The Company is subject to income taxes in the U.S. and various states.  Tax regulations are subject to interpretation of the related tax laws and regulations and require significant judgment to apply.