INCOME TAXES
Allocation of federal and state income taxes between current and deferred portions is as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| | | (In thousands) | | |
Current tax provision: | | | | | |
Federal | $ | 6,984 |
| | $ | 3,617 |
| | $ | 2,933 |
|
State | 1,551 |
| | 306 |
| | 206 |
|
| 8,535 |
| | 3,923 |
| | 3,139 |
|
Deferred tax provision (benefit): | | | | | |
Federal | 1,792 |
| | 344 |
| | 7 |
|
State | 77 |
| | 47 |
| | (148 | ) |
Statutory rate change | 2,500 |
| | (289 | ) | | — |
|
Federal and State | 4,369 |
| | 102 |
| | (141 | ) |
Change in valuation reserve | (1,678 | ) | | (220 | ) | | (161 | ) |
Deferred income tax provision (benefit) | 2,691 |
| | (118 | ) | | (302 | ) |
Provision for income taxes | $ | 11,226 |
| | $ | 3,805 |
| | $ | 2,837 |
|
The reasons for the differences between the statutory federal income tax provision and the actual tax provision (benefit) are summarized as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (Dollars in thousands) |
Statutory federal tax provision | $ | 9,700 |
| | $ | 4,236 |
| | $ | 3,429 |
|
Increase (decrease) resulting from: | | | | | |
State taxes, net of federal tax benefit | 1,058 |
| | 233 |
| | 39 |
|
Dividends received deduction | (26 | ) | | (41 | ) | | (211 | ) |
Tax-exempt bank-owned life insurance | (372 | ) | | (528 | ) | | (351 | ) |
Tax-exempt interest | (155 | ) | | (189 | ) | | (222 | ) |
Change in valuation reserve | (1,678 | ) | | (220 | ) | | (161 | ) |
Equity incentives | 121 |
| | 339 |
| | 52 |
|
Amortization of low income housing partnership | 166 |
| | 219 |
| | — |
|
Tax credits utilized | (188 | ) | | (286 | ) | | (45 | ) |
Accrual adjustment | 23 |
| | 207 |
| | 13 |
|
Statutory rate change | 2,500 |
| | (289 | ) | | — |
|
Other, net | 77 |
| | 124 |
| | 294 |
|
Tax provision | $ | 11,226 |
| | $ | 3,805 |
| | $ | 2,837 |
|
Effective tax rates | 40.5 | % | | 30.5 | % | | 28.2 | % |
The components of the net deferred tax asset are as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In thousands) |
Deferred tax assets: | | | |
Federal | $ | 6,742 |
| | $ | 11,700 |
|
State | 3,416 |
| | 3,258 |
|
Deferred tax assets, gross | 10,158 |
| | 14,958 |
|
Valuation reserve | (112 | ) | | (1,790 | ) |
Deferred tax assets, net | 10,046 |
| | 13,168 |
|
Deferred tax liabilities: | | | |
Federal | (3,050 | ) | | (2,427 | ) |
State | (996 | ) | | (595 | ) |
Deferred tax liabilities | (4,046 | ) | | (3,022 | ) |
Net deferred tax asset | $ | 6,000 |
| | $ | 10,146 |
|
The tax effects of each item that give rise to deferred tax assets (liabilities) are as follows: |
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In thousands) |
Deferred tax assets: | | | |
Depreciation and amortization | $ | 279 |
| | $ | 747 |
|
Employee benefit plans and share-based compensation plans | 410 |
| | 571 |
|
Allowance for loan losses | 5,868 |
| | 7,660 |
|
Contribution carryover | 1,122 |
| | 2,317 |
|
Net unrealized loss on securities held as, or transferred, from available for sale | — |
| | 893 |
|
Net unrealized losses on defined benefit pension plan | 757 |
| | 1,270 |
|
Deferred rent expense | 170 |
| | 123 |
|
Other | (31 | ) | | — |
|
Valuation reserve | (112 | ) | | (1,790 | ) |
Deferred tax liabilities: | | | |
Deferred loan origination costs | (1,338 | ) | | (1,947 | ) |
Net unrealized gain on securities held as, or transferred from, available for sale | (166 | ) | | — |
|
Gain on exchange of investment in Northeast Retirement Services | (959 | ) | | — |
|
Other | — |
| | 302 |
|
Net deferred tax asset | $ | 6,000 |
| | $ | 10,146 |
|
A summary of the change in the net deferred tax asset is as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Balance at beginning of year | $ | 10,146 |
| | $ | 10,665 |
| | $ | 6,233 |
|
Deferred tax (provision) benefit | (2,691 | ) | | 118 |
| | 302 |
|
Tax effect of changes in accumulated other comprehensive income | (1,455 | ) | | (637 | ) | | 4,130 |
|
Balance at end of year | $ | 6,000 |
| | $ | 10,146 |
| | $ | 10,665 |
|
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) became law. The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate tax rate from a maximum of 35% to 21%. The rate reduction is effective January 1, 2018.
Under U.S. Generally Accepted Accounting Principles, the Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. As a result of the reduction in the corporate tax rate to 21% from 35% under the Act, the Company has revalued its net deferred tax asset as of December 31, 2017 and as a result, recognized additional income tax expense of $2.5 million in the Company’s consolidated statement of net income for the fourth quarter of 2017.
For the year ended December 31, 2016, the Company recorded a tax benefit of $289,000 related to the statutory rate change from 34% to 35% and its impact on the Company's net deferred tax asset.
At December 31, 2017 and 2016, management maintained a valuation reserve in the amount of $112,000 and $1.8 million, respectively, primarily related to state deferred tax assets. During 2017, management determined that due to positive evidence supporting future state profitability, it is more likely than not a tax benefit could be realized for state deferred tax assets with the exception of a portion of the state charitable contribution carryforward. As a result, the Company reversed $1.7 million of valuation allowance with a corresponding benefit to the consolidated statement of net income.
At December 31, 2017, the Company allocated tax expense between the components of the consolidated statements of income as required by the intraperiod allocation rules.
The federal income tax reserve for loan losses at the Company’s base year amounted to $1.3 million. If any portion of the reserve is used for purposes other than to absorb loan losses, approximately 150% of the amount actually used (limited to the amount of the reserve) would be subject to taxation in the year in which used. As the Company intends to use the reserve to only absorb loan losses, a deferred income tax liability of $354,000 has not been provided.
The Company’s income tax returns are subject to review and examination by federal and state taxing authorities. The Company is currently open to audit under the applicable statutes of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2014 through 2017.
Management periodically evaluates the sustainability of tax positions taken. Whenever management estimates the probability of sustaining a tax position is at least more likely than not, the tax position is deemed warranted and is recognized at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and penalties related to uncertain tax positions are recognized as income tax expense. In the years ended December 31, 2017 and 2016, $13,000 and $22,000, respectively, of interest and penalties were paid. No interest or penalties were recorded for the year ended December 31, 2015.