On the Tax Cuts and Jobs Act was signed into law with sweeping modifications to the Internal Revenue Code. The primary change for Bancshares was to lower the Federal corporate income tax rate to from Bancshares re-measured its deferred tax assets and liabilities based on the income tax rates at which they are expected to reverse in the future, which is generally However, Bancshares will continue to analyze certain aspects of the Act, which result in refinements of the calculations that could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of Bancshares’ deferred tax balance was million, resulting in an increase of income tax expense for the year ended Additionally, we had maintained a deferred tax asset valuation allowance in relation to net operating loss carryovers and other items in relation to the acquisition of Regal Bank. Management determined that the concerns that existed at the time we established the valuation reserve relating to this acquisition longer existed and Bancshares therefore reversed this valuation allowance of million, resulting in a decrease to tax expense. The net impact of these items was a reduction of income tax expense of thousand. The components of income tax expense are as follows:

 

December 31,		2017				2016				2015
Current
Federal		$	4,850,926			$	(2,421,114	)		$	2,221,756
State			2,162,222				1,724,355				664,113
			7,013,148				(696,759	)			2,885,869
Deferred
Federal			1,999,926				7,556,701				1,993,829
State			(860,350	)			(47,344	)			502,692
			1,139,576				7,509,357				2,496,521
		$	8,152,724			$	6,812,598			$	5,382,390

 

We determine deferred tax assets and liabilities based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which we expect the differences to reverse. We allocate tax expense and tax benefits to the Bank and Bancshares based on their proportional share of taxable income.

 

The components of net deferred tax assets and liabilities are as follows:

 

December 31,		2017				2016
Deferred tax assets
Allowance for loan losses		$	1,245,747			$	2,323,236
Non-accrual interest			149,017				205,703
Impairment losses and expenses on other real estate owned			251,924				348,617
Director stock options			38,949				8,684
Deferred compensation plans			1,565,114				2,130,082
Net operating loss carryover			3,869,905				5,698,994
Fair value adjustments for acquired assets and liabilities			3,523,966				3,787,101
Non-compete agreements			52,972				85,136
Other			—				(28,756	)
Net unrealized loss on securities available for sale			1,061,187				3,242,175
		$	11,758,781			$	17,800,972
Deferred tax liabilities
Deferred loan origination costs, net		$	527,338			$	473,598
Depreciation			2,135,418				2,973,744
Other			45,885				—
Core deposit intangible amortization			1,733,044				1,388,630
			4,441,685				4,835,972
Net deferred tax asset before valuation allowance			7,317,096				12,965,000
Valuation allowance for deferred tax asset			—				(3,386,650	)
Net deferred tax asset		$	7,317,096			$	9,578,350

 

Maryland Bankcorp had net operating loss (“NOL”) carryovers of  million at the time of our business combination. We succeed to these carryovers and take limited annual deductions allowed by the Internal Revenue Code. We will be able to deduct every year the Bank has taxable income until the NOL is fully utilized. The amount we deduct in any year will be reduced if we recognize a built in loss in such year or if our taxable income is lower than the statutory NOL deduction. If the NOL is used by the limited annual deductions, any remaining amount of NOL carryforward will expire in

 

WSB Holdings, Inc. had NOL carryovers of  million at the time of our business combination in We succeed to these carryovers and take limited annual deductions allowed by the Internal Revenue Code. We will be able to deduct every year the Bank has taxable income until the NOL is fully utilized. The amount we deduct in any year will be reduced if we recognize a built in loss in such year or if our taxable income is lower than the statutory NOL deduction. If the NOL is used by the limited annual deductions, any remaining amount of NOL carryforward will expire in

 

Regal had NOL carryovers of million at the time of our business combination in We succeed to these carryovers and take limited annual deductions allowed by the Internal Revenue Service Code. We will be able to deduct every year the Bank has taxable income until the NOL is fully utilized. The amount we deduct in any year will be reduced if we recognize a built in loss in such year or if our taxable income is lower than the statutory NOL deduction. If the NOL is used by the limited annual deductions, any remaining amount of NOL carryforward will expire in Additionally, the deferred tax asset was increased by million at the time of acquisition and will be analyzed for utilization in future years. Management has determined that the concerns that existed at the time we established the valuation reserve relating to this acquisition longer existed and therefore Bancshares has reversed this valuation allowance in total.

 

DCB had NOL carryovers of thousand at the time of our business combination in We succeeded to these carryovers and take limited annual deductions allowed by the Internal Revenue Code. The amount we deduct in any year will be reduced if we recognize a built in loss in such year or if our taxable income is lower than the statutory NOL deduction. If the NOL is used by the limited annual deductions, any remaining amount of NOL carryforward will expire in

 

We classify interest and penalties related to income tax assessments, if any, in income tax expense in the consolidated statements of operations. Bancshares and its subsidiaries file a consolidated U.S. federal tax return and both Bancshares and the Bank file a Maryland state income tax return. These returns are subject to examination by taxing authorities for all years after We had material uncertain tax positions at or and there was unrecognized tax benefit as of or

 

The following table reconciles the differences between the federal income tax rate of  percent and our effective tax rate:

 

December 31,		2017				2016				2015
Statutory federal income tax rate			34.0	%			34.0	%			34	%
Increase (decrease) resulting from State income taxes, net of federal income tax benefit			6.3				5.3				4.7
Bank owned life insurance			(1.6	)			(1.9	)			(1.9	)
Other tax exempt income			(4.8	)			(5.0	)			(5.7	)
Stock based compensation awards			0.7				0.7				0.6
Other non-deductible expenses			1.8				0.8				1.2
Remove valuation allowance			(14.0	)			—				—
Deferred tax asset rate change			12.1
Other			(0.6	)			0.2				1.0
Effective tax rate			33.9	%			34.1	%			33.9	%