Entity information:
NOTE
11
- FEDERAL INCOME TAXES
 
On
December 22, 2017,
H.R.1,
commonly known as the Tax Cuts and Jobs Act (the “
Act”) was signed into law. The Act reduced our corporate federal tax rate from
35%
to
21%
effective
January 1, 2018
and changed certain other provisions. As a result
, we are required to re
-measure our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled. The effect of this re
-measurement is recorded to income tax expense in the year the tax law is enacted. For
2017,
the re
-measurement of our net deferred tax asset resulted in additional income tax expense of
$1.3
million. Concurrent with the enactment of the Act, the SEC staff issued Staff Accounting Bulletin
No.
118
(“SAB
118”
), which allows companies to recognize the cumulative impact of the income tax effects triggered by the enactment of the Act over a period of up to
twelve
months in the reporting period in which the adjustment is identified. We applied SAB
118
effective
December 22, 2017,
and will continue to refine the measurement of the net deferred tax balance during the preparation of our
2017
tax return as additional guidance and information becomes available.
 
The consolidated income tax expense is as follows:
 
   
2017
    
2016
    
2015
  
                         
Current expense
   $
13,978,000
     $
15,786,000
     $
7,399,000
  
Deferred expense
    
(505,000
)
    
(699,000
)
    
4,592,000
  
Effect of federal tax law change
    
1,336,000
      
0
      
0
  
Change in valuation allowance
    
0
      
(113,000
)
    
(180,000
)
Tax expens
e
   $
14,809,000
     $
14,974,000
     $
11,811,000
  
A reconciliation of the differences between the federal income tax expense recorded and the amount
computed by applying the federal statutory rate to income before income taxes is as follows:
 
   
201
7
    
201
6
    
201
5
  
                         
Tax at statutory rate (35%)
   $
16,129,000
     $
16,410,000
     $
13,591,000
  
Increase (decrease) from
                        
Tax-exempt interest
    
(1,030,000
)
    
(876,000
)
    
(781,000
)
Bank owned life insurance
    
(948,000
)
    
(440,000
)
    
(384,000
)
Effect of federal tax law change
    
1,336,000
      
0
      
0
  
Change in valuation allowance
    
0
      
(113,000
)
    
(180,000
)
Other
    
(678,000
)
    
(7,000
)
    
(435,000
)
Tax
expense
   $
14,809,000
     $
14,974,000
     $
11,811,000
  
 
 
Significant components of deferred tax assets and liabilities as of
December 31, 2017
and
2016
are as follows:
 
   
2017
    
2016
  
Deferred income tax assets
                
Allowance for loan losses
   $
4,095,000
     $
6,286,000
  
Deferred compensation
    
673,000
      
1,175,000
  
Stock compensation
    
501,000
      
786,000
  
Nonaccrual loan interest income
    
425,000
      
623,000
  
Deferred loan fees
    
211,000
      
496,000
  
Capital loss carryforward
    
94,000
      
157,000
  
Fair value write-downs on foreclosed properties
    
23,000
      
24,000
  
Fair value of interest rate swap
    
0
      
30,000
  
Unrealized loss on securities
    
1,303,000
      
2,976,000
  
Other
    
311,000
      
408,000
  
Deferred tax
asset before valuation allowance
    
7,636,000
      
12,961,000
  
Valuation allowance
    
(94,000
)
    
(157,000
)
Deferred tax asset after valuation allowance
    
7,542,000
      
12,804,000
  
                 
Deferred income tax liabilities
                
Depreciation
    
727,000
      
928,000
  
Prepaid expenses
    
244,000
      
463,000
  
Core deposit intangible
    
1,565,000
      
3,423,000
  
Mortgage loan servicing rights
    
1,072,000
      
1,940,000
  
Business combination adjustments
    
1,784,000
      
2,183,000
  
Other
    
146,000
      
199,000
  
Deferred tax liability
    
5,538,000
      
9,136,000
  
                 
Total net deferred tax asset
   $
2,004,000
     $
3,668,000
  
A valuation allowance related to deferred tax assets is required when it is considered more likely than
not
that all or part of the benefits related to suc
h assets will
not
be realized. At
December 31, 2017
and
2016,
we carried a valuation allowance of
$0.1
million and
$0.2
million, respectively, against capital loss carryforwards generated by the disposal of certain capital investments acquired in our merger with Firstbank. During
2017
and
2016,
we reversed $
0.0
million and
$0.1
million, respectively, of the valuation allowance due to generation of capital gains during the year. The remaining
$0.1
million of capital loss carryforwards will expire at
December 31, 2020
and we continue to carry a valuation allowance against the related deferred tax asset. We believe the remainder of our deferred tax assets is more likely than
not
to be realized.
 
We had
no
unrecognized tax
benefits at any time during
2017
or
2016
and do
not
anticipate any significant increase in unrecognized tax benefits during
2018.
Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in our income tax accounts;
no
such accruals existed at any time during
2017
or
2016.
Our U.S. federal income tax returns are
no
longer subject to examination for all years before
2014
.