Entity information:

NOTE L - INCOME TAXES

 

Federal income tax expense as reported differs from the amount computed by applying the statutory Federal income tax rate to income before taxes. A reconciliation of the differences by amount and percent is as follows:

 

FEDERAL INCOME TAX SUMMARY               
(DOLLARS IN THOUSANDS)  Year Ended December 31,
   2017  2016  2015
   $  %  $  %  $  %
                   
Income tax at statutory rate   2,952    34.0    3,028    34.0    2,811    34.0 
Tax-exempt interest income   (1,620)   (18.7)   (1,478)   (16.6)   (1,270)   (15.4)
Non-deductible interest expense   72    0.8    52    0.6    39    0.5 
Bank-owned life insurance   (234)   (2.7)   (267)   (3.0)   (247)   (3.0)
Other   37    0.4    18    0.2    25    0.3 
Change in corporate tax rate   1,131    13.1    —    —    —    — 
                               
Income tax expense   2,338    26.9    1,353    15.2    1,358    16.4 

 

 

The ability to realize the benefit of deferred tax assets is dependent upon a number of factors, including the generation of future taxable income, the ability to carry back losses to recover taxes paid in previous years, the ability to offset capital losses with capital gains, the reversal of deferred tax liabilities, and certain tax planning strategies.

 

The Corporation has a deferred tax asset for credits related to Alternative Minimum Taxes (AMT) of $1,158,000 as of December 31, 2017, and $1,043,000 as of December 31, 2016. The AMT credits have an unlimited carry-forward period. No valuation has been established for these deferred tax assets in view of the Corporation’s ability to carry forward tax credits to future years, coupled with the anticipated future taxable income as evidenced by the Corporation’s earnings potential. Additionally, this asset’s value was not impacted by the change in the corporate tax rate described below.

 

U.S. generally accepted accounting principles prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

 

There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Corporation recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Consolidated Statements of Income. With few exceptions, the Corporation is no longer subject to U.S. federal, state, or local income tax examinations by tax authorities for years before 2014.

 

The Tax Cuts and Jobs Act, enacted on December 22, 2017, lowered the Corporation’s federal income tax rate from 34% to 21% effective January 1, 2018. As a result, the carrying value of net deferred tax assets was reduced which increased income tax expense by $1,131,000.

Significant components of income tax expense are as follows:  

(DOLLARS IN THOUSANDS)

 

   Year Ended December 31,
   2017  2016  2015
   $  $  $
Current tax expense   842    1,734    1,095 
Deferred tax expense (benefit)   365    (381)   275 
Valuation allowance adjustment   —    —    (12)
Change in corporate tax rate   1,131    —    — 
Income tax expense   2,338    1,353    1,358 

 

 

Components of the Corporation's net deferred tax position are as follows:    

(DOLLARS IN THOUSANDS)

 

   December 31,
   2017  2016  2015
   $  $  $
          
Deferred tax assets               
Allowance for loan losses   2,802    2,571    2,406 
Net unrealized holding losses on securities available for sale   1,016    2,516    130 
Deferred compensation reserve   44    95    148 
Capital loss carryforward   —    —    13 
Tax credit carryforward   1,158    1,043    1,085 
Allowance for off-balance sheet extensions of credit   108    117    155 
Interest on non-accrual loans   174    166    155 
Other   11    7    7 
Total deferred tax assets   5,313    6,515    4,099 
Valuation allowance   —    —    (13)
Net deferred taxes   5,313    6,515    4,086 
                
Deferred tax liabilities               
Premises and equipment   (2,670)   (1,497)   (1,852)
Discount on investment securities   —    —    (1)
Other   (161)   (41)   (24)
Total deferred tax liabilities   (2,831)   (1,538)   (1,877)
Net deferred tax assets   2,482    4,977    2,209