Income Taxes

12 Months Ended

Dec. 31, 2019

Note 13

Income Taxes

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

	For the Years Ended December 31,
(In thousands)		2019		2018			2017
Current:
Federal	$	4,423	$	8,557		$	4,250
State		1,392		1,043			1,638
Deferred:
Federal		1,097		(3,404	)		4,256
State		150		(117	)		(259	)
Total income tax expense	$	7,062	$	6,079		$	9,885

A reconciliation of expected income tax expense (benefit), computed by applying the effective federal statutory rate of 21% for each of 2019 and 2018 and 35% for 2017 to income before income tax expense is as follows:

	For the Years Ended December 31,
(In thousands)		2019			2018			2017
Expected income tax expense	$	7,868		$	7,633		$	12,214
(Reductions) increases resulting from:
Tax-exempt income		(1,755	)		(2,009	)		(3,868	)
State taxes, net of federal benefit		1,218			732			896
Share-based compensation adjustment		(281	)		(286	)		(376	)
Adjustment of deferred tax asset or liability for TCJA		—			(74	)		1,824
Other, net		12			83			(805	)
Total income tax expense	$	7,062		$	6,079		$	9,885

Income tax expense in 2019 totaled $7,062,000 compared to $6,079,000 and $9,885,000 in 2018 and 2017, respectively. When measured as a percent of pre-tax income, the Company’s effective tax rate was 19% in 2019, 17% in 2018, and 28% in 2017. The increase in 2019 tax expense was primarily the result of the decrease in the amount of tax-exempt income from municipal bonds, an increase in state tax expense, and a prior year reduction of tax expense recorded from the final analysis and measurement of the TCJA.

Table of Contents

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)		2019			2018
Deferred tax assets:
Allowance for loan losses	$	2,452		$	2,376
ASC 715 pension funding liability		7,642			6,000
Net operating loss carryforward ⁽¹⁾		27			50
Supplemental executive retirement plan accrual		2,087			1,968
Stock compensation		1,987			1,673
Total deferred tax assets	$	14,195		$	12,067
Deferred tax liabilities:
Premises and equipment		(2,821	)		(1,937	)
Pension		(974	)		(409	)
Intangible assets		(1,379	)		(1,212	)
Unrealized gain on investment in securities available-for-sale		(3,348	)		(156	)
Other		(196	)		(80	)
Total deferred tax liabilities	$	(8,718	)	$	(3,794	)
Net deferred tax assets	$	5,477		$	8,273

⁽¹⁾

As of December 31, 2019, the Company had approximately $128,000 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 2024.

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, 2019 or 2018, 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)	2019			2018			2017
Balance at January 1	$	1,403		$	1,632		$	1,623
Changes in unrecognized tax benefits as a result of tax positions taken during a prior year		56			(135	)		(15	)
Changes in unrecognized tax benefits as a result of tax position taken during the current year		171			192			263
Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations		(331	)		(286	)		(239	)
Balance at December 31	$	1,299		$	1,403		$	1,632

At December 31, 2019, 2018 and 2017, the balances of the Company’s unrecognized tax benefits which would, if recognized, affect the Company’s effective tax rate were $1,184,000, $1,272,000 and $1,464,000, respectively. These amounts are net of the offsetting benefits from other taxing jurisdictions.

As of December 31, 2019, 2018 and 2017, the Company had $151,000, $136,000 and $139,000, respectively, in accrued interest related to unrecognized tax benefits.

The Company believes it is reasonably possible that the total amount of unrecognized tax benefits will decrease by approximately $315,000 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 2016 through 2018 remain subject to examination by the Internal Revenue Service. In addition, the Company is subject to state tax examinations for the tax years 2015 through 2018. The Company is currently under audit from the Internal Revenue Service for the 2017 tax year.