INCOME TAXES
The components of the provision for federal income taxes are as follows:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (Dollars in thousands) |
Current | $ | 8,320 |
| | $ | 11,162 |
| | $ | 8,221 |
|
Deferred | 427 |
| | (1,608 | ) | | (446 | ) |
Total | $ | 8,747 |
| | $ | 9,554 |
| | $ | 7,775 |
|
Reported income tax expense differs from the amounts computed by applying the U.S. federal statutory income tax rate to income before income taxes for the years ended December 31, 2017, 2016 and 2015 due to the following:
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (Dollars in thousands) |
Taxes calculated at statutory rate | $ | 9,233 |
| | $ | 11,342 |
| | $ | 8,247 |
|
Increase (decrease) resulting from: | |
| | |
| | |
|
Stock based compensation | (755 | ) | | 67 |
| | 393 |
|
Provisional deferred tax adjustment related to reduction in U.S. federal statutory income tax rate | 2,621 |
| | — |
| | — |
|
Effect of tax exempt income | (2,328 | ) | | (1,929 | ) | | (890 | ) |
Other, net | (24 | ) | | 74 |
| | 25 |
|
Total | $ | 8,747 |
| | $ | 9,554 |
| | $ | 7,775 |
|
Income tax expense for 2017 was impacted by the adjustment of the Company's deferred tax assets related to the reduction in the U.S. federal statutory income tax rate to 21% under the Tax Cuts and Jobs Act, which was enacted on December 22, 2017. As a result of the new law, the Company recognized a provisional net tax expense totaling $2.6 million. During 2016, the Company adopted a new accounting standard that requires the income tax effects associated with stock-based compensation to be recognized as a component of income tax expense. The Company recognized net tax benefits related to stock-based compensation totaling $1.1 million in 2017 and $371 thousand in 2016.
Year-end deferred taxes are presented in the table below. As a result of the Tax Cuts and Jobs Act enacted on December 22, 2017, deferred taxes as of December 31, 2017 are based on the newly enacted U.S. statutory federal income tax rate of 21%. Deferred taxes as of December 31, 2016 are based on the previously enacted U.S. statutory federal income tax rate of 35%.
Deferred tax assets and liabilities are as follows:
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
| (Dollars in thousands) |
Deferred tax assets: | |
| | |
|
Allowance for credit losses | $ | 5,284 |
| | $ | 6,938 |
|
Net unrealized loss on available for sale securities | — |
| | 1,642 |
|
Deferred compensation | 177 |
| | 168 |
|
Total deferred tax assets | 5,461 |
| | 8,748 |
|
| | | |
Deferred tax liabilities: | |
| | |
|
Core deposit intangible and other purchase accounting adjustments | (1,100 | ) | | (1,953 | ) |
Net unrealized gain on available for sale securities | (65 | ) | | — |
|
Premises and equipment basis difference | (321 | ) | | (568 | ) |
Total deferred tax liabilities | (1,486 | ) | | (2,521 | ) |
Net deferred tax assets | $ | 3,975 |
| | $ | 6,227 |
|
The amount of federal and state income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other nondeductible items. For the year ended December 31, 2017, income tax expense was $8.7 million compared with $9.6 million for the year ended December 31, 2016 and $7.8 million for the year ended December 31, 2015. The decrease in income tax expense for 2017 compared to 2016 was primarily due to lower pre-tax earnings. The increase in income tax expense for 2016 compared to 2015 was primarily attributable to higher pre-tax earnings. The effective income tax rate for the year ended December 31, 2017 was 33.2% compared to 29.5% for the year ended December 31, 2016 and 33.0% for the year ended December 31, 2015. The effective tax rate increased for the year ended 2017 compared to the same period in 2016 and 2015 due to the the nonrecurring tax provision adjustment recorded as a result of the revaluation of the deferred tax asset due to the enactment of the Tax Cuts and Jobs Act partially offset by tax free income from the purchase of additional municipal securities and from cashless exercises of stock options by employees in 2017.
Interest and penalties related to tax positions are recognized in the period in which they begin accruing or when the entity claims the position that does not meet the minimum statutory thresholds. The Company does not have any uncertain tax positions and does not have any interest and penalties recorded in the income statement for the years ended December 31, 2017, 2016 and 2015. The Company is no longer subject to examination by the US Federal Tax Jurisdiction for the years prior to 2014.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on
accounting for the tax effects of the Tax Cuts and Jobs Act. SAB 118 provides a measurement period that should not extend beyond
one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. The Company’s
financial results reflect the income tax effects of the Tax Cuts and Jobs Act for which the accounting under ASC Topic 740 is complete
and provisional amounts for those specific income tax effects of the Tax Cuts and Jobs Act for which the accounting under ASC Topic
740 is incomplete but a reasonable estimate could be determined.