Income Taxes
The total tax expense consisted of the following for the years ended December 31, 2017 and 2016:
|
| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
| (In thousands) |
Current income tax expense: | | | |
Federal | $ | 957 |
| | $ | 301 |
|
State | 298 |
| | 175 |
|
| 1,255 |
| | 476 |
|
Deferred income tax expense (benefit): | |
| | |
|
Federal | 550 |
| | 187 |
|
State | (37 | ) | | (10 | ) |
| 513 |
| | 177 |
|
| $ | 1,768 |
| | $ | 653 |
|
A reconciliation of the statutory federal income tax at a rate of 34% to the income tax expense included in the statements of income for the year ended December 31, 2017 and 2016 is as follows:
|
| | | | | | | | | | | | | |
| Year ended December 31, |
| 2017 | | 2016 |
| Amount | | % of Pretax Income | | Amount | | % of Pretax Income |
Federal income tax at statutory rate | $ | 1,526 |
| | 34.0 | % | | $ | 617 |
| | 34.0 | % |
State tax, net of federal benefit | 172 |
| | 3.8 |
| | 109 |
| | 6.0 |
|
Bank Owned Life Insurance | (140 | ) | | (3.1 | ) | | (107 | ) | | (5.9 | ) |
ESOP and stock-based compensation | (486 | ) | | (10.8 | ) | | 12 |
| | 0.7 |
|
Impact of rate change on net deferred tax assets | 678 |
| | 15.1 |
| | — |
| | — |
|
Other | 18 |
| | 0.4 |
| | 22 |
| | 1.2 |
|
| $ | 1,768 |
| | 39.4 | % | | $ | 653 |
| | 36.0 | % |
For the year ended December 31, 2017, certain directors, executive officers and directors emeriti executed options to purchase 212,468 shares of Common Stock at a per share exercise price of $9.4323. In lieu of issuing shares of Common Stock upon the exercise of such options, the Company made a cash payment to such optionees equal to the excess of the closing price of the Common Stock on the Nasdaq Stock Market on August 4, 2017 of $17.30 over the per share exercise price of such options of $9.4323 multiplied by the number of options being exercised. An aggregate of $1.7 million was paid to the optionees. In addition, the change in tax rate included a permanent tax deduction for the year ended December 31, 2017 period due to restricted stock that vested.
The impact of rate change on the net deferred tax assets was attributable to the revaluation of the Company's deferred tax asset as a result of the passage of the Tax Cuts and Jobs Act on December 22, 2017 which significantly reduced corporate tax rates. As a result, the Company recorded an additional tax provision of $678,000 for the revaluation for the year ended December 31, 2017.
The components of the net deferred tax asset at December 31, 2017 and 2016 were as follows:
|
| | | | | | | |
| At December 31, | | At December 31, |
| 2017 | | 2016 |
| (In thousands) |
Deferred tax assets: | | | |
Allowances for losses on loans and commitments | $ | 1,535 |
| | $ | 1,800 |
|
Uncollected interest | 9 |
| | 85 |
|
Benefit plans | 533 |
| | 774 |
|
Benefit plans AOCI | — |
| | 81 |
|
Restricted stock award | 36 |
| | 63 |
|
| 2,113 |
| | 2,803 |
|
Deferred tax liabilities | |
| | |
|
Depreciation | (423 | ) | | (519 | ) |
Net deferred tax asset included in other assets | $ | 1,690 |
| | $ | 2,284 |
|
Retained earnings included $1.5 million at December 31, 2017 and 2016 for which no provision for income tax has been made. These amounts represent deductions for bad debt reserves for tax purposes which were only allowed to savings institutions which met certain definitional tests prescribed by the Internal Revenue Code of 1986, as amended (the "Code"). The Small Business Job Protection Act of 1996 (the "Act") eliminated the special bad debt deduction granted solely to thrifts. Under the terms of the Act, there would be no recapture of the pre-1988 (base year) reserves. However, these pre-1988 reserves would be subject to recapture under the rules of the Code if the Bank itself pays a cash dividend in excess of earnings and profits, or liquidates. The Act also provides for the recapture of deductions arising from the "applicable excess reserve" defined as the total amount of reserve over the base year reserve. The Bank's total reserve exceeds the base year reserve and deferred taxes have been provided for this excess.