INCOME TAXES
The components of the provision for income taxes for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
| | | | | |
| (Dollars in thousands) |
Current income tax provision | $ | 21,721 |
| | $ | (8,763 | ) | | $ | 13,723 |
|
Deferred income tax expense (benefit) | 5,243 |
| | 8,361 |
| | (3,409 | ) |
Total income tax provision | $ | 26,964 |
| | $ | (402 | ) | | $ | 10,314 |
|
The effective tax rates differ from the statutory federal tax rate of 35% largely due to tax exempt interest income earned on certain investment securities and loans, the nontaxable earnings on bank owned life insurance, stock-based compensation expense and the 2017 re-valuation of the deferred tax asset.
The provision for income taxes differs from the amount computed by applying the federal income tax statutory rate of 35% to income from continuing operations for the years ended December 31, 2017, 2016 and 2015, as follows:
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
| | | | | |
| (Dollars in thousands) |
Taxes calculated at statutory rate | $ | 21,385 |
| | $ | (481 | ) | | $ | 9,014 |
|
Increase (decrease) resulting from: | | | | | |
State tax expense, net of federal effect | 195 |
| | 386 |
| | 196 |
|
Non-deductible expenses | 51 |
| | 51 |
| | 45 |
|
Non-deductible dues | 37 |
| | 35 |
| | 31 |
|
Bank-owned life insurance income | (321 | ) | | (326 | ) | | (141 | ) |
Incentive stock option compensation expense | (187 | ) | | (16 | ) | | — |
|
Tax exempt interest income | (34 | ) | | (17 | ) | | — |
|
Non-deductible M&A and acquisition related costs | — |
| | — |
| | 857 |
|
Other, net | — |
| | (34 | ) | | 312 |
|
Change in applicable statutory rate | 5,838 |
| | — |
| | — |
|
Income tax provision—as reported | $ | 26,964 |
| | $ | (402 | ) | | $ | 10,314 |
|
Income tax expense for 2017 includes $5.8 million in tax expense for the deferred tax asset revaluation resulting from the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act was enacted on December 22, 2017 and requires that deferred taxes as of December 31, 2017 be based on the newly enacted U.S. statutory federal corporate income tax rate of 21%. In the table below, deferred taxes for the year-ended December 31, 2016 are based on the previously enacted U.S. statutory corporate income tax rate of 35%.
The Company has completed its accounting under ASU 740, Income Taxes, for all material deferred tax assets and liabilities. Provisional amounts have been recorded for certain immaterial items including Schedules K-1 from CRA related partnership investments. As a result of the revaluation, we recorded $5.8 million in income tax expense for 2017. Material adjustment to provisional amounts are not expected.
Significant deferred tax assets and liabilities at the dates indicated were as follows:
|
| | | | | | | |
| December 31, |
| 2017 | | 2016 |
| | | |
| (Dollars in thousands) |
Deferred tax assets: | |
| | |
|
Allowance for credit losses | $ | 6,556 |
| | $ | 9,233 |
|
Acquired loan valuation allowance | 835 |
| | 3,493 |
|
Net operating loss carryforward | 989 |
| | 1,755 |
|
Nonqualified stock options and restricted stock | 1,449 |
| | 1,561 |
|
Real estate acquired by foreclosure write-downs | 583 |
| | 1,432 |
|
Acquired deposit valuation allowance | 273 |
| | 804 |
|
Unrealized loss on available-for-sale securities | 2,093 |
| | 390 |
|
Pre-opening expenses | 58 |
| | 120 |
|
Non-accrual loan interest | 828 |
| | 809 |
|
Other | 310 |
| | 852 |
|
Total deferred tax assets | 13,974 |
| | 20,449 |
|
Deferred tax liabilities: | |
| | |
|
Goodwill and core deposit intangibles | 2,436 |
| | 4,337 |
|
Acquired subordinated debentures valuation allowance | 1,709 |
| | 2,996 |
|
Acquired investments valuation allowance | 413 |
| | 688 |
|
Deferred loan costs | 476 |
| | 674 |
|
Depreciable assets | 83 |
| | 392 |
|
Other | 99 |
| | 96 |
|
Total deferred tax liabilities | 5,216 |
| | 9,183 |
|
Net deferred tax asset | $ | 8,758 |
| | $ | 11,266 |
|
Realization of the net deferred tax asset is dependent on generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that all of the net deferred tax asset will be realized. The deferred tax asset is evaluated by management on an ongoing basis to determine if a valuation allowance is required. Assessing the need for a valuation allowance requires that management evaluate all evidence, both negative and positive, to determine whether a valuation allowance is needed. Based on management’s analysis of the evidence, no valuation allowance was required to be recorded against the net deferred tax asset of $8.8 million at December 31, 2017. The deferred tax assets are primarily supported by future reversals of existing timing differences and the generation of future taxable income.
Net operating loss carryforwards for federal income tax purposes were $4.7 million and $5.0 million at December 31, 2017 and 2016, respectively. The carryforwards expire beginning in 2032.
In connection with the Patriot acquisition completed in October 2015, the Company recognized a $1.6 million liability for an uncertain tax position for the year ended December 31, 2016. The full $1.6 million would, if recognized, affect the effective tax rate. The uncertain tax position as of the dates indicated were as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
| | | | | |
| (Dollars in thousands) |
Unrecognized tax benefits - January 1 | $ | 1,625 |
| | $ | 1,625 |
| | $ | — |
|
Gross increases - tax positions in current period | — |
| | — |
| | 1,625 |
|
Unrecognized tax benefits - December 31 | $ | 1,625 |
| | $ | 1,625 |
| | $ | 1,625 |
|
The Company files income tax returns in the U.S. federal jurisdiction and the Texas, Kentucky and California state jurisdictions. Other than described above, as of December 31, 2017, 2016 and 2015 the Company had identified no unrecognized tax benefits related to returns with open periods subject to examination. The periods subject to examination for the Company’s federal return are the 2014 through 2017 tax years. The Company has assumed net operating loss carryforwards, “acquired NOLs”, through its acquisitions. The tax periods of the acquired entities from which these acquired NOLs originated are considered open years for purposes of adjusting the amount of the acquired NOLs used in the Company’s open years. The Company is subject to examination from 2013 forward for state income tax returns. The Company’s policy is that it recognizes interest and penalties as a component of income tax expense. As of December 31, 2017 and 2016, the Company had no accrued interest or penalties.
Tax Cuts and Jobs Act - The Tax Cuts and Jobs Act was enacted on December 22, 2017. Among other things, the new law (i) establishes a new, flat, federal statutory corporate income tax rate of 21%, (ii) eliminates the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any taxable year, (iii) limits the deduction for net interest expense incurred by U.S. corporations, (iv) allows businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets, (v) eliminates or reduces certain deductions related to meals and entertainment expenses, (vi) modifies the limitation on excessive employee compensation to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee and (vii) limits the deductibility of deposit insurance premiums for banks in excess of $5 billion in assets. The Company is still analyzing certain aspects of the new law and refining its calculations, which could affect the measurement of these deferred tax assets and liabilities or result in additional deferred amounts.