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Income Taxes

12 Months Ended

Dec. 31, 2017

Income Tax Disclosure [Abstract]

Note 13
Income Taxes

The components of income tax expense (benefit) are as follows:

		For the Years Ended December 31,
(In thousands)		2017				2016			2015
Current:
Federal		$	4,250			$	6,456		$	6,825
State			1,638				941			1,290
Deferred:
Federal			4,256				301			(84	)
State			(259	)			18			(53	)
Total income tax expense		$	9,885			$	7,716		$	7,978

A reconciliation of expected income tax expense (benefit), computed by applying the effective federal statutory rate of 35% for each of 2017, 2016 and 2015 to income before income tax expense is as follows:

		For the Years Ended December 31,
(In thousands)		2017				2016				2015
Expected income tax expense		$	12,214			$	11,223			$	10,862
(Reductions) increases resulting from:
Tax-exempt income			(3,868	)			(3,754	)			(3,704	)
State taxes, net of federal benefit			896				623				804
Share-based compensation adjustment			(376	)			—				—
Adjustment of deferred tax asset or liability for TCJA			1,824				—				—
Other, net			(805	)			(376	)			16
Total income tax expense		$	9,885			$	7,716			$	7,978

On December 22, 2017, the TCJA was enacted. Among other things, the new law (i) establishes a new, flat corporate federal statutory 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 remuneration 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. The TCJA also significantly changes U.S. tax law related to foreign operations, though, such changes do not currently impact the Company on a significant level.

Also on December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for tax effects of the TCJA. SAB 118 provides a measurement period of up to one year from the enactment date to complete the accounting. Based on the information available and current interpretation of the rules, the Company has made provisional estimates of the impact of the reduction in the corporate tax rate and remeasurement of certain deferred tax assets and liabilities based on the rate at which they are expected to reverse in the future. The final analysis and measurement will be completed during 2018 when the Company files the 2017 U.S. federal income tax return.

Income tax expense in 2017 totaled $9,885,000 compared to $7,716,000 and $7,978,000 in 2016 and 2015, respectively. When measured as a percent of pre-tax income, the Company’s effective tax rate was 28% in 2017, 24% in 2016, and 26% in 2015. The increase in 2017 tax expense was primarily the result of a one-time, non-cash charge of $1,824,000 triggered by the passage of the TCJA on December 22, 2017. The charge consists of the following:

●	The deferred tax inventory was revalued at the new rate of 21% and resulted in a net credit of $462,000.
●	AOCI related to pension and unrealized gains/losses on securities available for sale was revalued at the new rate of 21% and resulted in a net charge of $2,286,000.

The Company’s effective tax rate for 2017 including and excluding the one-time TCJA charge was 28% and 25%, respectively. As a result of the lower TCJA rates, the effective rate for 2018 is anticipated to decrease by approximately 25% vs. the 2017 rate excluding the TCJA charge. The Company’s effective tax rate has traditionally been lower than the statutory rate because of investments and loans that are tax exempt.

The tax effects of temporary differences which give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

		December 31,
(In thousands)		2017				2016
Deferred tax assets:
Allowance for loan losses		$	2,413			$	3,718
ASC 715 pension funding liability			6,080				8,969
Net operating loss carryforward⁽¹⁾			76				169
Supplemental executive retirement plan accrual			1,833				2,604
Stock compensation			1,307				1,695
Other			118				177
Total deferred tax assets		$	11,827			$	17,332
Deferred tax liabilities:
Premises and equipment			(2,248	)			(2,731	)
Pension			(1,379	)			(3,601	)
Intangible/assets			(1,091	)			(1,402	)
Unrealized gain on investment in securities available-for-sale			(1,938	)			(560	)
Deferred income			(2,121	)			—
Total deferred tax liabilities		$	(8,777	)		$	(8,294	)
Net deferred tax assets		$	3,050			$	9,038

⁽¹⁾

As of December 31, 2017, the Company had approximately $361,000 of net operating loss carry forwards as a result of the acquisition of Franklin Bancorp. The utilization of the net operating loss carry forward is subject to Section 382 of the Internal Revenue Code and limits the Company’s use to approximately $122,000 per year during the carry forward period, which expires in 2020.

A valuation allowance would be provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. The Company has not established a valuation allowance at December 31, 2017 or 2016, due to management’s belief that all criteria for recognition have been met, including the expectation of projected future taxable income sufficient to support the realization of deferred tax assets.

The reconciliation of the beginning unrecognized tax benefits balance to the ending balance is presented in the following table:

(In thousands)		2017				2016				2015
Balance at January 1		$	1,623			$	1,194			$	1,117
Changes in unrecognized tax benefits as a result of tax positions taken during a prior year			(15	)			407				10
Changes in unrecognized tax benefits as a result of tax position taken during the current year			263				311				277
Decreases in unrecognized tax benefits relating to settlements with taxing authorities			—				—				—
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations			(239	)			(289	)			(210	)
Balance at December 31		$	1,632			$	1,623			$	1,194

At December 31, 2017, 2016 and 2015, the balance of the Company’s unrecognized tax benefits which would, if recognized, affect the Company’s effective tax rate was $1,464,000, $1,225,000 and $861,000, respectively. These amounts are net of the offsetting benefits from other taxing jurisdictions.

As of December 31, 2017, 2016 and 2015, the Company had $139,000, $108,000 and $54,000, respectively, in accrued interest related to unrecognized tax benefits. During 2017 and 2016, the Company recorded a net increase in accrued interest of $31,000 and $54,000, respectively.

The Company believes it is reasonably possible that the total amount of tax benefits will decrease by approximately $299,000 over the next 12 months. The reduction primarily relates to the anticipated lapse in the statute of limitations. The unrecognized tax benefits relate primarily to apportionment of taxable income among various state tax jurisdictions.

The Company is subject to income tax in the U.S. federal jurisdiction, numerous state jurisdictions, and a foreign jurisdiction. The Company’s federal income tax returns for tax years 2014 through 2016 remain subject to examination by the Internal Revenue Service. In addition, the Company is subject to state tax examinations for the tax years 2013 through 2016.