Note 7 — Income Taxes
The components of the income tax expense (benefit) are as follows for the years ended December 31:
|
(Dollars in thousands) |
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
10,778 |
|
|
$ |
12,194 |
|
|
$ |
9,060 |
|
|
State |
|
|
1,709 |
|
|
|
1,850 |
|
|
|
1,452 |
|
|
|
|
|
12,487 |
|
|
|
14,044 |
|
|
|
10,512 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
3,468 |
|
|
|
(670 |
) |
|
|
(217 |
) |
|
State |
|
|
522 |
|
|
|
(101 |
) |
|
|
(33 |
) |
|
Deferred |
|
|
3,990 |
|
|
|
(771 |
) |
|
|
(250 |
) |
|
Income tax expense |
|
$ |
16,477 |
|
|
$ |
13,273 |
|
|
$ |
10,262 |
|
Note 7 — Income Taxes - Continued
The combined federal and state income tax expense differs from that computed at the federal statutory corporate tax rate as follows:
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Federal statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
Tax rate change |
|
|
13.0 |
% |
|
|
- |
|
|
|
- |
|
|
State taxes, net of federal income tax benefit |
|
|
2.9 |
% |
|
|
3.1 |
% |
|
|
3.1 |
% |
|
Tax-exempt interest and income |
|
|
(2.1 |
)% |
|
|
(2.1 |
)% |
|
|
(2.4 |
)% |
|
Equity awards expense |
|
|
(2.8 |
)% |
|
|
(0.3 |
)% |
|
|
- |
|
|
Other, net |
|
|
(0.6 |
)% |
|
|
0.3 |
% |
|
|
(1.4 |
)% |
|
Effective tax rate |
|
|
45.4 |
% |
|
|
36.0 |
% |
|
|
34.3 |
% |
The nature and components of the Company’s net deferred income tax assets are as follows as of December 31:
|
(Dollars in thousands) |
|
2017 |
|
|
2016 |
|
||
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
5,792 |
|
|
$ |
6,724 |
|
|
Deferred loan fees and costs |
|
|
1,436 |
|
|
|
1,594 |
|
|
Fair value adjustments on certificates of deposit |
|
|
170 |
|
|
|
79 |
|
|
Deferred compensation |
|
|
427 |
|
|
|
565 |
|
|
Unrealized loss on securities |
|
|
701 |
|
|
|
626 |
|
|
State franchise taxes |
|
|
362 |
|
|
|
630 |
|
|
Other |
|
|
740 |
|
|
|
563 |
|
|
|
|
|
9,628 |
|
|
|
10,781 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
|
FHLB dividends |
|
|
157 |
|
|
|
241 |
|
|
Mortgage servicing rights |
|
|
192 |
|
|
|
328 |
|
|
Basis difference in premises, equipment and other assets |
|
|
452 |
|
|
|
413 |
|
|
|
|
|
801 |
|
|
|
982 |
|
|
Net deferred income tax assets |
|
$ |
8,827 |
|
|
$ |
9,799 |
|
The Federal government signed into law the Tax Cuts and Jobs Act (the “Act”), which amended the Internal Revenues Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the federal corporate tax rate from a maximum of 35% to a flat rate of 21%. The rate reduction was effective January 1, 2018. Consequently, the lower corporate income tax rate reduces the future net tax benefits of timing differences between book and taxable income recorded by the Company as net deferred income tax assets. As a result, the Company re-measured its net deferred income tax assets at the end of 2017, and recorded additional income tax expense of $4.7 million related to the write-down of deferred income tax assets due to the reduction in the Federal corporate income tax rate.
The Company believes, based on available information, that it is more likely than not that the net deferred income tax asset will be realized in the normal course of operations. The impact of a tax position is recognized in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. As of December 31, 2017, the Company did not have any significant uncertain tax positions. As of December 31, 2016, the Company had an uncertain tax position related to a rehabilitation credit, which was resolved in the Company’s favor in 2017. The Company includes any interest and penalties associated with unrecognized tax benefits within the provision for income taxes. As of December 31, 2017, there was no liability for unrecognized tax benefits. As of December 31, 2016, there was a liability of $200,000 for unrecognized tax benefits, which was resolved and recorded as an income tax credit in 2017. The Company does not expect a material change to the total amount of unrecognized tax benefits in the next twelve months.
Note 7 — Income Taxes - Continued
The Company elected to adopt the provisions of Accounting Standards Update 2016-09, Compensation—Stock Compensation (Topic 718) in 2016. The credit to current tax expense related to tax-deductible stock compensation expense was $1.2 million in 2017 and $201,000 in 2016.
The Company files U.S. and state income tax returns in jurisdictions with various statutes of limitations. The 2014 through 2017 tax years remain subject to selection for examination as of December 31, 2017. None of the Company’s income tax returns are currently under audit. As of December 31, 2017 and 2016, the Company has no net operating loss or credit carry-forwards.