NOTE 12 - INCOME TAXES

Allocation of federal and state income taxes between current and deferred portions is as follows:


	Years Ended December 31,
	2017	2016	2015
Current
Federal	$ 5,584	$ 3,675	$ 3,255
State	1,686	1,296	1,128
	7,270	4,971	4,383

Deferred
Federal	1,894	(460)	(643)
State	(7)	(95)	(107)
	1,887	(555)	(750)
Income tax expense	$ 9,157	$ 4,416	$ 3,633

The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:


	2017		2016		2015
	Amount	Percent of Pre-Tax Income	Amount	Percent of Pre-Tax Income	Amount	Percent of Pre-Tax Income
Expected income tax expense at
federal tax rate	$ 5,728	35.00%	$ 3,994	34.00%	$ 3,392	34.00%
State taxes net of federal
benefit	1,096	6.70%	796	6.78%	647	6.49%
Nondeductible expenses	255	1.56%	37	0.31%	40	0.40%
Nontaxable income	(376)	(2.30%)	(375)	(3.19%)	(398)	(3.99%)
Provisional deferred tax adjustment related to reduction in U.S. federal statutory income tax rate	2,740	16.74%	-	0.00%	-	0.00%
Other	(286)	(1.75%)	(36)	(0.31%)	(48)	(0.48%)

	$ 9,157	55.95%	$ 4,416	37.59%	$ 3,633	36.42%

Income tax expense for 2017 was impacted by the adjustment of our deferred tax assets and liabilities related to the reduction in the U.S. federal statutory income tax rate to 21% under the Tax Cuts and Jobs Act, which was enacted on December 22, 2017. As a result of the new law, we recognized a provisional net tax expense of $2.7 million.

The net deferred tax assets in the accompanying balance sheets include the following components:


	2017	2016
Deferred tax assets
Allowance for loan losses	$ 2,893	$ 3,890
Deferred compensation	2,142	2,520
OREO valuation allowance & expenses	337	413
Unrealized loss on investment securities	452	605
Depreciation	29
Other	142	509
	5,995	7,937
Deferred tax liabilities
FHLB stock dividends	109	156
Depreciation	-	15
	109	171

	$ 5,886	$ 7,766

The Tax Cuts and Jobs Act was enacted on December 22, 2017. 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 Tax Cuts and Jobs Act also significantly changes U.S. tax law related to foreign operations, however, such changes do not currently impact the Company.

As stated above, as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017, we calculated deferred tax assets and liabilities based upon the newly enacted U.S. statutory federal income tax rate of 21%, which is the tax rate at which these assets and liabilities are expected to reverse in the future. We will continue to analyze certain aspects of the new law and refine our calculations based on this analysis and future tax positions taken, which could affect the measurement of these assets and liabilities or give rise to new deferred tax amounts. We recognized a provisional net tax expense related to the calculation of our deferred tax assets and liabilities totaling $2.7 million.

The FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income,” which allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act from AOCI to retained earnings. The Company early adopted this standard for the quarter ended December 31, 2017. See Notes 1 and 2 for further information.

On Friday, December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118). SAB 118 indicated that a reporting entity must record a reasonable estimate in the first period in which it is possible to determine a reasonable estimate. Under SAB 118, reasonable estimates are considered “provisional amounts” that have to be updated when additional information becomes available and the evaluation and computation of the additional information is complete. A reporting entity must act in good faith and update provisional amounts as soon as more information becomes available, evaluated and prepared, during a measurement period that cannot exceed one year from the enactment date. Initial reasonable estimates and subsequent changes to provisional amounts should be reported in income tax expense or benefit from continuing operations in the period in which they are determined.

Retained earnings at December 31, 2017 and 2016 included approximately $1.2 million of bad debt deductions allowed for federal income tax purposes (the “base year tax reserve”) for which no deferred income tax has been recognized. If, in the future, this portion of retained earnings is used for any purpose other than to absorb bad debt losses, it would create income for tax purposes only and income taxes would be imposed at the then prevailing rates. The unrecorded income tax liability on the above amount was approximately $330,000 and 463,000 at December 31, 2017 and 2016.

The Company does not have uncertain tax positions that are deemed material and did not recognize any adjustments for unrecognized tax benefits. The Company’s policy is to recognize interest and penalties on income taxes as a component of tax expense. The Company is no longer subject to U.S. Federal tax examinations by tax authorities for years before 2014.