First Financial Northwest, Inc. - 10-K filing on 2017-03-10

Federal Income Taxes

12 Months Ended

Dec. 31, 2012

The components of income tax expense for the years indicated are as follows:



	Year Ended December 31,
	2016		2015		2014
	(In thousands)
Current	$	2,164	$	717	$	254
Deferred	1,548		4,170		5,602
Total income tax expense	$	3,712	$	4,887	$	5,856

A reconciliation of the tax provision based on the statutory corporate rate of 35% during the years ended December 31, 2016, 2015 and 2014 on pretax income is as follows:



	Year Ended December 31,
	2016			2015			2014
	(In thousands)
Income tax expense at statutory rate	$	4,412		$	4,917		$	5,790
Income tax effect of:
Tax exempt interest, net	(103		)	(38		)	(8		)
Change in valuation allowance	—			(112		)	19
Benefit of lower federal tax bracket	—			(39		)	—
Other, net	(597		)	159			55
Total income tax expense	$	3,712		$	4,887		$	5,856

The net deferred tax asset, included in the accompanying consolidated balance sheets, consisted of the following at the dates indicated:



	December 31,
	2016		2015		2014
	(In thousands)
Deferred tax assets:
Net operating loss carryforward	$	—	$	—	$	3,052
Charitable contributions	—		7		2
ALLL	3,803		3,257		3,599
Reserve for unfunded commitments	131		187		128
Deferred compensation	592		646		688
Net unrealized loss on investments available-for-sale	557		—		—
Alternative minimum tax credit carryforward	45		1,375		1,939
Employee benefit plans	951		1,051		1,535
Net capital loss on investments	—		—		450
OREO market value adjustments	231		213		414
Accrued expenses	453		510		165
Deferred tax assets before valuation allowance	6,763		7,246		11,972
Valuation allowance	—		—		(450		)
Total deferred tax assets	6,763		7,246		11,522
Deferred tax liabilities:
FHLB stock dividends	$	552	$	1,255	$	1,337
Loan origination fees and costs	1,477		870		744
Net unrealized gain on investments available for sale	—		44		432
Derivatives fair value gain	467		—		—
Fixed assets	869		299		472
Other, net	256		222		199
Total deferred tax liabilities	$	3,621	$	2,690	$	3,184
Deferred tax assets, net	$	3,142	$	4,556	$	8,338

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.

At December 31, 2016 and 2015, the Company had no net operating loss carryforward. At December 31, 2016, the Company had an alternative minimum tax credit carryforward totaling $45,000, with no expiration date.

As a result of the bad debt deductions taken in years prior to 1988, retained earnings includes accumulated earnings of approximately $4.5 million, on which federal income taxes have not been provided. If, in the future, this portion of retained earnings is used for any purpose other than to absorb losses on loans or on property acquired through foreclosure, federal income taxes may be imposed at the then-prevailing corporate tax rates. The Bank does not contemplate that such amounts will be used for any purpose that would create a federal income tax liability; therefore no provision has been made.

Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a portion of the deferred tax asset will not be realized. In order to support a conclusion that a valuation allowance is not needed, management evaluates both positive and negative evidence under the “more likely than not” standard. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which the strength of the evidence can be objectively verified. As of December 31, 2016, it was determined the full deferred tax asset would be realized in future periods and a valuation allowance would not be necessary.