Entity information:
Note 7 – Income Taxes
 
At year-end, components of income tax expense/(benefit) consist of the following:
 
 
 
(Dollars in thousands)
 
 
 
2017
 
 
2016
 
Federal:
 
 
 
 
 
 
 
 
Current
 
$
1,898
 
 
$
2,343
 
Deferred
 
 
275
 
 
 
(129
)
Revaluation of net deferred tax asset
 
 
517
 
 
 
-
 
State:
 
 
 
 
 
 
 
 
Current
 
 
77
 
 
 
80
 
Deferred, net of valuation allowance
 
 
102
 
 
 
254
 
Income tax expense
 
$
2,869
 
 
$
2,548
 
 
Effective tax rates differ from the federal statutory rate of 34% applied to income before income taxes due to the following:
 
 
 
(Dollars in thousands)
 
 
 
2017
 
 
2016
 
Federal statutory rate
 
 
34
%
 
 
34
%
Tax expense at statutory rate
 
$
4,022
 
 
$
3,975
 
State tax, net of federal effect
 
 
118
 
 
 
220
 
Tax exempt income
 
 
(1,302
)
 
 
(1,318
)
Bank owned life insurance
 
 
(156
)
 
 
(160
)
Captive insurance
 
 
(307
)
 
 
(179
)
Revaluation of net deferred tax asset
 
 
517
 
 
 
-
 
Other
 
 
(23
)
 
 
10
 
Total income tax expense
 
$
2,869
 
 
$
2,548
 
   
 
At December 31, the components of the net deferred tax asset recorded in the consolidated balance sheets are as follows:
 
 
 
(Dollars in thousands)
 
 
 
2017
 
 
2016
 
Deferred tax assets:
 
 
 
 
 
 
 
 
Bad debts
 
$
1,885
 
 
$
2,872
 
Deferred loan fees
 
 
32
 
 
 
60
 
Deferred compensation
 
 
332
 
 
 
503
 
Unrealized depreciation on securities available-for-sale, net
 
 
-
 
 
 
771
 
Net operating loss, state
 
 
290
 
 
 
294
 
Tax credits
 
 
99
 
 
 
98
 
Nonaccrual loan interest income
 
 
71
 
 
 
109
 
Share based compensation
 
 
133
 
 
 
126
 
REO writedowns
 
 
25
 
 
 
-
 
Unqualified deferred compensation plan
 
 
51
 
 
 
74
 
Other-than-temporary impairment
 
 
57
 
 
 
92
 
Accrued vacation
 
 
59
 
 
 
129
 
Impairment on land
 
 
48
 
 
 
71
 
Other
 
 
15
 
 
 
29
 
Total deferred tax assets
 
 
3,097
 
 
 
5,228
 
 
 
 
 
 
 
 
 
 
Deferred tax liabilities:
 
 
 
 
 
 
 
 
Depreciation
 
 
(641
)
 
 
(850
)
Prepaids
 
 
(237
)
 
 
(346
)
Mortgage servicing rights
 
 
(26
)
 
 
(51
)
Deferred stock dividends
 
 
(65
)
 
 
(97
)
Unrealized appreciation on securities available-for-sale, net
 
 
(188
)
 
 
-
 
Purchase accounting
 
 
(100
)
 
 
(88
)
Other
 
 
(209
)
 
 
(181
)
Total deferred tax liabilities
 
 
(1,466
)
 
 
(1,613
)
Valuation allowance
 
 
(80
)
 
 
(98
)
Net deferred tax asset
 
$
1,551
 
 
$
3,517
 
 
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law. Among other changes, the Act reduces the corporate federal income tax rate from 34% to 21% effective January 1, 2018. As a result of these changes made by the Act, the Bancorp made the determination to revalue its net deferred tax asset, as deferred tax assets and liabilities are to be measured using enacted rates expected to apply in years in which the deferred tax assets and liabilities are expected to be recovered or settled. The revaluation of the deferred tax assets and liabilities are adjusted through income tax expense in the year the changes in tax laws are enacted. The revaluation of the net deferred tax asset resulted in additional income tax expense of $517 thousand for 2017. The $517 thousand tax expense was $628 thousand net of a tax benefit of $111 thousand relating to the other comprehensive income revaluation adjustment.
 
At December 31, 2017, the Bancorp has a state net operating loss carry forward of approximately $6.9 million which will begin to expire in 2024 if not used. The Bancorp also has a state tax credit carry forward of approximately $126 thousand which has begun to expire in 2017 and will continue to expire if not used. Management has concluded that the state net operating loss will be fully utilized and therefore no valuation allowance is necessary on the state net operating loss. A valuation allowance remains in place on the state tax credit carryforward. A valuation allowance of $80 thousand and $98 thousand was provided at December 31, 2017 and December 31, 2016, respectively, for the state tax credits.
 
The Bancorp qualified under provisions of the Internal Revenue Code, to deduct from taxable income a provision for bad debts in excess of the provision for such losses charged to income in the financial statements, if any. Accordingly, retained earnings at December 31, 2017 and 2016 includes, approximately $6.0 million for which no provision for federal income taxes has been made. If, in the future this portion of retained earnings is used for any purpose other than to absorb bad debt losses, federal income taxes would be imposed at the then applicable rate. The unrecorded deferred income tax liability on the above amounts was approximately $1.3 million and $2.0 million at December 31, 2017 and 2016.
 
The Bancorp had no unrecognized tax benefits at any time during 2017 or 2016 and does not anticipate any significant increase or decrease in unrecognized tax benefits during 2018. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Bancorp's policy to record such accruals through income tax accounts; no such accruals existed at any time during 2017 or 2016.
 
The Bancorp and its subsidiaries are subject to US Federal income tax as well as income tax of the states of Indiana and Illinois. The Bancorp is no longer subject to examination by taxing authorities for the years before 2014 for federal and 2013 for state.