Note 13 – Income Taxes
The Bank pays income taxes in Guam and the Commonwealth of the Northern Mariana Islands under a territorial “mirror” of the U.S. Internal Revenue Code, with payments made to the respective territorial governments instead of the U.S. Treasury; there is no equivalent of a state income tax in either of these jurisdictions. The Bank also pays taxes to the governments of the Republic of Palau, the Federated States of Micronesia, the Republic of the Marshall Islands and the State of California.
The income tax provision includes the following components:
|
|
|
For the Years |
|
|||||||||
|
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
|
Government of Guam tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
4,686 |
|
|
$ |
2,168 |
|
|
$ |
2,767 |
|
|
Deferred |
|
|
(961 |
) |
|
|
(866 |
) |
|
|
(416 |
) |
|
Foreign income taxes (including U.S. income taxes) |
|
|
1,991 |
|
|
|
2,764 |
|
|
|
1,405 |
|
|
Total income tax expense |
|
$ |
5,716 |
|
|
$ |
4,066 |
|
|
$ |
3,756 |
|
The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:
|
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
|
Statutory Guam income tax rate |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
Permanent differences |
|
|
-4.54 |
% |
|
|
-7.52 |
% |
|
|
-6.80 |
% |
|
Other |
|
|
0.20 |
% |
|
|
0.00 |
% |
|
|
1.00 |
% |
|
Total income tax expense |
|
|
29.66 |
% |
|
|
26.48 |
% |
|
|
28.20 |
% |
The difference between effective income tax expense and income tax expense computed at the Guam statutory rate was due to nontaxable interest income earned on loans to the Government of Guam for each of the years ended December 31, 2016, 2015 and 2014.
The components of deferred income taxes are as follows:
|
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|||
|
Deferred loan origination fees |
|
$ |
(123 |
) |
|
$ |
62 |
|
|
$ |
(50 |
) |
|
Mortgage servicing rights |
|
|
23 |
|
|
|
20 |
|
|
|
18 |
|
|
Loan loss provision |
|
|
(447 |
) |
|
|
(575 |
) |
|
|
(155 |
) |
|
Deferred rent |
|
|
(18 |
) |
|
|
(19 |
) |
|
|
(21 |
) |
|
Other real estate owned valuation |
|
|
21 |
|
|
|
(48 |
) |
|
|
- |
|
|
Fixed assets |
|
|
23 |
|
|
|
23 |
|
|
|
22 |
|
|
Stock-based compensation |
|
|
(65 |
) |
|
|
(10 |
) |
|
|
(10 |
) |
|
SERP |
|
|
(343 |
) |
|
|
(290 |
) |
|
|
(220 |
) |
|
Accrued bonus |
|
|
(32 |
) |
|
|
(29 |
) |
|
|
- |
|
|
Net operating loss |
|
|
(461 |
) |
|
|
(455 |
) |
|
|
(304 |
) |
|
Change in valuation allowance |
|
|
461 |
|
|
|
455 |
|
|
|
304 |
|
|
Deferred tax (benefit) provision |
|
$ |
(961 |
) |
|
$ |
(866 |
) |
|
$ |
(416 |
) |
The components of the net deferred tax asset are as follows:
|
|
|
2016 |
|
|
2015 |
|
||
|
Deferred tax asset: |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
5,340 |
|
|
$ |
4,893 |
|
|
Net operating loss |
|
|
3,195 |
|
|
|
2,734 |
|
|
Loan origination fees |
|
|
875 |
|
|
|
753 |
|
|
Stock-based compensation |
|
|
498 |
|
|
|
433 |
|
|
Net unrealized gain on securities held-to-maturity |
|
|
15 |
|
|
|
19 |
|
|
Net unrealized gain on securities available-for-sale |
|
|
1,108 |
|
|
|
988 |
|
|
Deferred rent |
|
|
321 |
|
|
|
302 |
|
|
Accruals not currently deductible |
|
|
1,456 |
|
|
|
1,102 |
|
|
Total deferred tax asset |
|
|
12,808 |
|
|
|
11,224 |
|
|
Deferred tax liability: |
|
|
|
|
|
|
|
|
|
Fixed assets |
|
|
(987 |
) |
|
|
(964 |
) |
|
Mortgage servicing rights |
|
|
(528 |
) |
|
|
(505 |
) |
|
Total deferred tax liability |
|
|
(1,515 |
) |
|
|
(1,469 |
) |
|
Valuation allowance |
|
|
(3,196 |
) |
|
|
(2,734 |
) |
|
Net deferred tax asset |
|
$ |
8,097 |
|
|
$ |
7,021 |
|
A valuation allowance of $3.2 million has been provided at December 31, 2016, to reduce the deferred tax asset because, in management’s opinion, it is more likely than not that less than the entire amount will be realized. This is primarily due to the operating losses in the CNMI region.
We record as a “deferred tax asset” on our balance sheet an amount equal to the tax credit and tax loss carry-forwards and tax deductions (“tax benefits”) that we believe will be available to us to offset or reduce the amounts of our income taxes in future periods. Under applicable federal and state income tax laws and regulations, such tax benefits will expire if not used within specified periods of time. Accordingly, the ability to fully use our deferred tax asset depends on the amount of taxable income that we generate during those time periods. At least once each year, or more frequently, if warranted, we make estimates of future taxable income that we believe we are likely to generate during those future periods. If we conclude, on the basis of those estimates and the amount of the tax benefits available to us, that it is more likely than not that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude on the basis of those estimates and the amount of the tax benefits available to us that it has become more likely than not that we will be unable to utilize those tax benefits in full prior to their expiration, then we would establish (or increase any existing) valuation allowance to reduce the deferred tax asset on our balance sheet to the amount which we believe we are more likely than not to be able to utilize. Such a reduction is implemented by recognizing a non-cash charge that would have the effect of increasing the provision, or reducing any credit, for income taxes that we would otherwise have recorded in our statements of operations. The determination of whether and the extent to which we will be able to utilize our deferred tax asset involves significant management judgments and assumptions that are subject to period-to-period changes as a result of changes in tax laws, changes in the market, or economic conditions that could affect our operating results or variances between our actual operating results and our projected operating results, as well as other factors.
The Bank is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2010.