OLD SECOND BANCORP INC

Note 12: Income Taxes

Income tax expense for years ending December 31 were as follows:



	2017		2016		2015
Current federal	$	(2,407)	$	399	$	220
Deferred federal		11,724		6,824		7,023
Deferred state		372		1,597		1,733
Expense due to enactment of federal tax reform		9,475		-		-
Total income tax expenses	$	19,164	$	8,820	$	8,976

The following were the components of the deferred tax assets and liabilities as of December 31:


	2017		2016
Allowance for loan and lease losses	$	5,377	$	7,057
Deferred compensation		650		735
Amortization of core deposit intangible		827		1,401
Goodwill amortization/impairment		6,087		10,127
Stock based compensation		866		946
OREO write-downs		2,385		5,110
Federal net operating loss (“NOL”) carryforward		7,240		19,362
State net operating loss (“NOL”) carryforward		7,020		7,735
Deferred tax credit		-		2,058
Other assets		1,017		1,199
Total deferred tax assets		31,469		55,730

Accumulated depreciation on premises and equipment		(384)		(681)
Mortgage servicing rights		(2,086)		(2,760)
State tax benefits		(2,389)		(4,127)
Other liabilities		(545)		(526)
Total deferred tax liabilities		(5,404)		(8,094)
Net deferred tax asset before adjustments related to other comprehensive loss		26,065		47,636
Tax effect of adjustments related to other comprehensive loss		(709)		5,828
Net deferred tax asset	$	25,356	$	53,464

On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Act”), was signed into law. Among other things, the Act reduces the corporate federal tax rate from 35% to 21% effective January 1, 2018. As a result the Company is required to remeasure, through income tax expense, deferred tax assets and liabilities using the enacted rate at which these items are expected to recover or settle. The re-measurement of the Company’s net deferred tax asset resulted in additional income tax expense of approximately $9.5 million. The Company also re-measured the net deferred tax asset as a result of the Illinois income tax increase effective as of July 1, 2017, resulting in a benefit of approximately $1.6 million.

At December 31, 2017, the Company had a $34.5 million federal net operating loss carryforward of which, $10.6 million expires in 2031, $8.6 million expires in 2032, and $15.3 million expires in 2033. The Company had a $74.1 million state net operating loss carryforward of which $73.6 million expires in 2025, and the rest expires starting in 2026. In addition, the Company had a $2.6 million alternative minimum tax credit carryforwards which do not expire and are now carried as tax receivables since, under the new federal law, the Company expects to recover the entire amount by 2022 via refund.

The components of the provision for deferred income tax expense for the years ending December 31 were as follows:



	2017		2016		2015
Provision for loan and lease losses	$	1,680	$	42	$	2,480
Deferred Compensation		85		(45)		97
Amortization of core deposit intangible		574		228		230
Stock based compensation		80		(132)		(151)
OREO write-downs		2,725		1,807		1,722
Federal net operating loss carryforward		12,122		4,743		2,896
State net operating loss carryforward		715		1,011		659
Deferred tax credit		2,058		(309)		(198)
Depreciation		(297)		80		(201)
Mortgage servicing rights		(674)		276		164
Goodwill amortization/impairment		4,040		1,496		1,506
State tax benefits		(1,738)		(559)		(604)
Other, net		201		(217)		156
Total deferred tax expense	$	21,571	$	8,421	$	8,756

Effective tax rates differ from federal statutory rates applied to financial statement income for the years ended December 31 due to the following:


	2017		2016		2015
Tax at statutory federal income tax rate	$	11,817	$	8,577	$	8,526
Nontaxable interest income, net of disallowed interest deduction		(1,976)		(347)		(253)
BOLI income		(501)		(449)		(487)
State income taxes, net of federal benefit		1,775		1,148		1,126
Impact of Federal tax rate change		9,475		-		-
Impact of Illinois tax rate change		(1,566)		-		-
Other, net		140		(109)		64
Total tax at effective tax rate	$	19,164	$	8,820	$	8,976

The Company evaluated positive and negative evidence in order to determine if it was more likely than not that the deferred tax asset would be recovered through future income. Significant positive evidence evaluated included recent and projected earnings, significantly improved asset quality and an improved capital position. No negative evidence was noted.