Middlefield Banc Corp.

13.	INCOME TAXES

The provision for federal income taxes

for the years ended

December 31,

consists of:

(Dollar amounts in thousands)	2017		2016			2015

Current payable	$	3,929	$	1,998		$	1,004
Deferred		293		(93	)		558

Total provision	$	4,222	$	1,905		$	1,562

The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows

December 31,:

(Dollar amounts in thousands)	2017		2016

Deferred tax assets:
Allowance for loan and lease losses	$	1,210	$	2,243
Supplemental retirement plan		528		382
Investment security basis adjustment		18		66
Nonaccrual interest income		371		456
OREO adjustments		2		26
Accrued compensation		201		261
Other		86		82
Gross deferred tax assets		2,416		3,516

Deferred tax liabilities:
Premises and equipment		356		445
Net unrealized gain on securities		347		618
FHLB stock dividends		139		225
Intangibles		307		449
Mortgage servicing rights		71		103
Deferred origination fees, net		294		63
Acquisition fair value adjustments		250		1
Other		5		5
Gross deferred tax liabilities		1,769		1,909

Net deferred tax assets	$	647	$	1,607

valuation allowance was established at

December 31,

2017

and

2016,

in view of the Company’s ability to carry back to taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company's earnings potential.

The reconciliation between the federal statutory rate and the Company

’s effective consolidated income tax rate for the years ended

December 31,

is as follows:

(Dollar amounts in thousands)	2017						2016						2015
				% of						% of						% of
				Pretax						Pretax						Pretax
	Amount			Income			Amount			Income			Amount			Income

Provision at statutory rate	$	4,651			34.0	%	$	2,829			34.0	%	$	2,866			34.0	%
Tax-exempt income		(1,045	)		(7.6	)%		(1,177	)		(14.1	)%		(1,347	)		(15.9	)%
Nondeductible interest expense		32			0.2	%		32			0.4	%		34			0.4	%
Nondeductible merger-related expense		43			0.3	%		186			2.2	%		-			-	%
Stock-based compensation		(50	)		(0.4	)%		-			-	%		-			-	%
Change in effective corporate tax rate		401			2.9	%		-			-	%		-			-	%
Other		190			1.5	%		35			0.4	%		9			-	%

Actual tax expense and effective rate	$	4,222			30.9	%	$	1,905			22.9	%	$	1,562			18.5	%

ASC

740

‐

prescribes 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

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

longer meet the more

‐

likely

‐

than

‐

not

recognition threshold should be derecognized in the

first

subsequent financial reporting period in which that threshold is

longer met.

December 22,

201

H.R.1,

commonly known as the Tax Cuts and Jobs Act (the “Act”), was signed into law. The Act includes many provisions that will affect our income tax expense, including reducing our federal tax rate from

34%

21%

effective

January 1, 2018.

As a result of the rate reduction, we are required to re-measure, through income tax expense in the period of enactment, our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled. The re-measurement of our net deferred tax asset resulted in additional

2017

income tax expense of

$401,000.

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.

We recorded provisional amounts of deferred income taxes using reasonable estimates in

one

area where information necessary to complete the accounting was

not

available,

prepared, or analyzed. Our deferred tax liability for temporary differences between the tax and financial reporting bases of fixed assets principally due to the accelerated depreciation under the Act which allows for full expensing of qualified property purchased and placed in service after

September 27, 2017.

We will complete and record the income tax effects of this provisional item during the period the necessary information becomes available. This measurement period will

not

extend beyond

December 22, 2018.

December 31, 2017

and

December 31, 2016,

the Company had

ASC

740

unrecognized tax benefits. The Company does

not

expect the total amount of unrecognized tax benefits to significantly increase within the next

months. The Company recognizes interest and penalties on unrecognized tax benefits as a component of income tax expense.

The Company and the Bank are subject to U.S. federal income tax as well as an income tax in the state of Ohio, and the Bank is subject to a capital

‐

based franchise tax in the state of Ohio. The Company and the Bank are

longer subject to examination by taxing authorities for years before

December 31, 2014.