Income Taxes

12 Months Ended

Dec. 31, 2019

The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) included a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. The 2017 Tax Act required a re-measurement of the Company’s deferred tax asset (“DTA”) in the fourth quarter of 2017. As a result, the Company recorded a charge of $2.7 million to write down the DTA during the fourth quarter of 2017.

The Company files federal income tax returns on a calendar year basis. Income tax expense for the years indicated is summarized as follows:


(dollars in thousands)	2019		2018		2017
Current	$	6,123	$	5,747	$	7,260
Deferred	137		2,137		2,512
NMTC	(400)		(400)		—
Impact of Tax Cuts and Jobs Act	—		(789)		2,721
Total income tax expense	$	5,860	$	6,695	$	12,493

The components of the Company’s net deferred tax asset, which is included in accrued interest receivable and other assets in the accompanying Statement of Financial Condition as of December 31 of the years indicated are as follows:


(dollars in thousands)	2019		2018
Deferred tax assets:
Provision for loan losses	$	3,752	$	3,433
Discount on purchased loans	1,842		2,916
Salary continuation plan	678		656
Mortgage servicing rights	95		115
Deferred compensation	52		107
Stock-based compensation	264		340
Unrealized loss on securities available for sale	—		586
Other	101		102
Deferred tax assets	$	6,784	$	8,255
Deferred tax liabilities:
FHLB stock dividends	$	(108)	$	(162)
Accumulated depreciation	(2,974)		(3,298)
Intangible assets	(858)		(1,135)
Premium on investment securities acquired	—		(88)
Unrealized gain on securities available for sale	(184)		—
NMTC	(48)		(24)
Other	(96)		(161)
Deferred tax liabilities	(4,268)		(4,868)
Net deferred tax asset	$	2,516	$	3,387

For the years ended December 31, 2019, 2018 and 2017, the Company’s provision for federal income taxes differed from the amount computed by applying the federal income tax statutory rates of 21%, 21% and 35%, respectively, on income from operations as indicated in the following analysis:


(dollars in thousands)	2019			2018			2017
Federal tax based on statutory rate	$	7,089		$	8,023		$	10,242
State tax based on statutory rate	34			82			54
(Decrease) increase resulting from:
NMTC	(400)			(400)			—
Effect of tax-exempt income	(128)			(171)			(234)
Changes in the cash surrender value of bank owned life insurance	(435)			(138)			(173)
Nondeductible merger-related expenses	—			—			129
Nondeductible share based compensation expense	177			191			374
Exercise of stock options	(599)			(131)			(656)
DTA adjustment – impact of Tax Act	—			(789)			2,721
Other	122			28			36
Income tax expense	$	5,860		$	6,695		$	12,493
Effective tax rate	17.3		%	17.5		%	42.6		%

Retained earnings as of December 31, 2019 and 2018, included $5,837,000 for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reductions of amounts so allocated for purposes other than bad debt losses would create income for tax purposes only, which would be subject to the then-current federal statutory income tax rate. The unrecorded deferred income tax liability on the above amount was $1,985,000 as of December 31, 2019 and 2018. Current accounting standards do not require the accrual of this deferred tax amount to be recorded unless it is probable that the reserve (for tax purposes) will be significantly depleted by loan losses

deductible for tax purposes in the future. Based on current estimates of losses within the Company’s loan portfolio, accrual of the deferred tax liability associated with this reserve was not required as of December 31, 2019 and 2018.