BAR HARBOR BANKSHARES

INCOME TAXES

The following table summarizes the current and deferred components of income tax expense for each of the years ended December 31, 2017, 2016 and 2015:



(in thousands)	2017		2016		2015
Current:
Federal Tax Expense	$	8,705	$	5,189	$	5,607
State Tax Expense	1,039		217		218
Total Current Expense	9,744		5,406		5,825

Deferred	2,898		470		142
Impact of federal tax reform enactment	3,988		—		—
Total Income Tax Expense	$	16,630	$	5,876	$	5,967

The following table reconciles the expected federal income tax expense (computed by applying the federal statutory tax rate of 35%) to recorded income tax expense for the years ended December 31, 2017, 2016 and 2015:



	2017					2016					2015
(in thousands, except ratios)	Amount			Rate		Amount			Rate		Amount			Rate
Statutory Tax Rate	$	14,918		35.00	%	$	7,283		35.00	%	$	7,392		35.00	%
Increase (Decrease) Resulting From:
State taxes, net of federal benefit	986			2.31		141			0.68		142			0.67
Tax exempt interest	(2,074		)	-4.87		(1,388		)	-6.67		(1,303		)	-6.17
Federal tax credits	(130		)	-0.30		—			—		—			—
Officers' life insurance	(538		)	-1.26		(244		)	-1.17		(209		)	-0.99
Acquisition Costs	89			0.21		289			1.39		—			—
Stock-based compensation plans	(241		)	-0.57		—			—		—			—
Impact of federal tax reform enactment	3,988			9.36		—			—		—			—
Other	(368		)	-0.86		(205		)	-0.99		(55		)	-0.26
Effective Tax Rate	$	16,630		39.02	%	$	5,876		28.24	%	$	5,967		28.25	%

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are summarized below. The net deferred tax asset, which is included in other assets, amounted to $7.2 million at December 31, 2017 and $6.0 million at December 31, 2016.

The significant components of deferred tax assets and liabilities at December 31, 2017 and December 31, 2016 were as follows:



	2017				2016
(in thousands)	Assets (1)		Liabilities (1)		Assets (2)		Liabilities (2)
Allowance for loan losses	$	2,729	$	—	$	3,733	$	—
Deferred compensation	3,333		—		1,018		—
Unrealized gain or loss on securities available for sale	649		—		1,144		—
Unrealized gain or loss on derivatives	853		—		968		—
Unfunded post-retirement benefits	—				219		—
Depreciation	—		1,356		—		537
Deferred loan origination costs	—		655		—		517
Other real estate owned	8		—		12		—
Non-accrual interest	273		—		215		—
Write down of impaired investments	—		—		626		—
Branch acquisition costs and goodwill	—		737		—		760
Core deposit intangible	—		1,525		82		—
Acquisition fair value adjustments	4,000		—		—		—
Prepaid expenses	—		302		—		275
Interest rate cap premium amortization	—		276		—		352
Mortgage servicing rights	—		769		—		5
Equity compensation	297		—		310		—
Prepaid pension	—		345		—		—
Contract incentives	594		—		—		—
Other	409		—		110		1
Total	$	13,145	$	5,965	$	8,437	$	2,447

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(1) 2017 balances reflect a federal statutory rate of 21%

(2) 2016 balances reflect a federal statutory rate of 35%

The Company has determined that a valuation allowance is not required for its net deferred tax asset since it is more likely than not that this asset is realizable principally through future taxable income and future reversal of existing temporary differences.

The Company is subject to income tax in the U.S. federal jurisdiction and also in the states of Maine, New Hampshire and Massachusetts. The Company is no longer subject to examination by taxing authorities for years before 2014.

On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Act”), was signed into law. The Act includes several provisions that will affect the Company's federal income tax expense, including reducing the federal income tax rate from 35% to 21% effective January 1, 2018. As a result of this rate reduction, the Company is required to re-measure, through income tax expense in the period of enactment, the deferred tax assets and liabilities using the enacted rate at which these items are expected to be recovered or settled. The re-measurement of the Company's net deferred tax asset resulted in additional 2017 income tax expense of $4.0 million.

Also on December 22, 2017, the U.S. Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 118 (“SAB 118”) to address any uncertainty or diversity of views in practice in accounting for the income tax effects of the Act in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete this accounting in the reporting period that includes the enactment date. SAB 118 allows for a measurement period not to extend beyond one year from the Act’s enactment date to complete the necessary accounting.

The Company's $1.4 million deferred tax liability for temporary differences between the tax and financial reporting bases of fixed assets was recorded as a provisional amount based upon reasonable estimates. The final determination of this deferred tax liability is awaiting completion of a cost segregation analysis to determine the impact of applying accelerated tax depreciation to certain building costs, including application of the Act's new provisions for 100% bonus depreciation.

The Company made no adjustments to deferred tax assets representing future deductions for accrued compensation that may be subject to new limitations under Internal Revenue Code Section 162(m) which, generally, limits the annual deduction for certain compensation paid to certain employees to $1 million. There is uncertainty in applying the newly-enacted rules to existing contracts, and the Company is seeking further clarifications before completing its analysis.

The Company will complete and record the income tax effects of these provisional items during the period the necessary information becomes available. This measurement period will not extend beyond December 22, 2018.