(18)	INCOME TAXES

The Company and its subsidiaries file consolidated income tax returns. The components of consolidated income tax expense (benefit) were as follows for the years ended September 30, 2016 and 2015:

(In thousands)	2016		2015

Current	$	109	$	1,463
Tax benefit allocated to additional paid-in capital related to equity incentive plan		-		149
Deferred		(2,431)		(36)

Income tax expense (benefit)	$	(2,322)	$	1,576

The reconciliation of income tax expense (benefit) with the amount which would have been provided at the federal statutory rate of 34 percent follows for the years ended September 30, 2016 and 2015:

(In thousands)	2016		2015

Provision at federal statutory rate	$	1,900	$	2,831
State income tax-net of federal tax benefit		27		93
Tax-exempt interest income		(877)		(772)
Bank owned life insurance		(151)		(444)
Captive insurance net premiums		(297)		(313)
Increase in deferred tax valuation allowance		1,597		-
Historic tax credit		(4,660)		-
Other		139		181

Income tax expense (benefit)	$	(2,322)	$	1,576

Significant components of deferred tax assets and liabilities at September 30, 2016 and 2015 are as follows:

(In thousands)	2016		2015

Deferred tax assets:
Allowance for loan losses	$	2,745	$	2,586
Deferred compensation plans		461		412
Equity incentive plans		69		69
Other-than-temporary impairment loss on available for sale securities		14		14
Valuation allowance on other real estate owned		96		89
Interest on nonaccrual loans		193		196
Discount on unguaranteed portion of SBA loans		121		-
Loss on tax credit investment		1,597		-
Historic tax credit carryforward		2,306		-
Deferred loan fees and costs, net		80		46
Gross deferred tax assets		7,682		3,412
Valuation allowance		(1,597)		-
Net deferred tax assets		6,085		3,412

Deferred tax liabilities:
Unrealized gain on securities available for sale		(3,232)		(2,361)
Accumulated depreciation		(825)		(1,302)
Installment sale		(520)		-
Loan servicing rights		(118)		-
Acquisition purchase accounting adjustments		(507)		(382)
FHLB stock dividends		(130)		(131)
Unrealized gain on trading account securities		(13)		(31)
Unrealized gain on loans held for sale		-		(60)
Other		(320)		(285)
Deferred tax liabilities		(5,665)		(4,552)

Net deferred tax asset (liability)	$	420	$	(1,140)

Tax laws enacted in 2013 and 2014 decrease the Indiana financial institutions tax rate beginning in 2014 and ending in 2023. Deferred taxes have been adjusted to reflect the newly enacted rates and the period in which temporary differences are expected to reverse.

In assessing the ability of the Company to realize the benefit of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, availability of operating loss carrybacks, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which deferred tax assets are deductible, management believes it is more likely than not the Company will generate sufficient taxable income to realize the benefits of these deductible differences at September 30, 2016, except for a valuation allowance of $1.6 million on the net deferred tax asset related to losses on a historic tax credit investment totaling $4.2 million. In assessing the need for a valuation allowance for the deferred tax assets for the historic tax credit investment, the Company considered all positive and negative evidence in assessing whether the weight of available evidence supports the recognition of some or all of the deferred tax assets related to the investment. Because of the tax nature of the loss to be recognized when the investment is ultimately sold (which for tax purposes will give rise to a capital loss for the historic tax credit investment), the Company may not be able to generate capital gains in the future to be able to utilize the capital losses from the investment. Therefore, the Company’s assessment of the deferred tax asset warrants the need for a valuation allowance.

At September 30, 2016, the Company had a federal historic tax credit of $2.3 million available to reduce federal income taxes in subsequent years. The carryover expires during the year ending September 30, 2036.

At September 30, 2016 and 2015, the Company had no liability for unrecognized income tax benefits and does not anticipate any increase in the liability for unrecognized tax benefits during the next twelve months. The Company believes that its income tax positions would be sustained upon examination and does not anticipate any adjustments that would result in a material change to its financial position or results of operations. The Company files consolidated U.S. federal and Indiana state income tax returns. Returns filed in these jurisdictions for tax years ended on or after September 30, 2012 are subject to examination by the relevant taxing authorities. Each entity included in the consolidated federal and state income tax returns filed by the Company are charged or given credit for the applicable tax as though separate returns were filed.

Retained earnings of the Bank at September 30, 2016 and 2015 include approximately $4.6 million for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of September 30, 1988 for tax purposes only. Reduction of such allocated amounts for purposes other than tax bad debt losses, including redemption of bank stock, excess dividends or loss of “bank” status, would create income for tax purposes only, subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on these amounts was approximately $1.5 million at September 30, 2016 and 2015.