Entity information:
NOTE
1
3
Income Taxes
Income tax
expense for the years ended
December 31, 2017,
2016
and
2015
is as follows:
 
(Dollars in thousands)
  
2017
    
2016
    
2015
  
Current:
                        
Federal
  
$
2,287
      
939
      
(87
 )
State
  
 
10
      
55
      
(24
 )
Total current
  
 
2,297
      
994
      
(111
 )
Deferred:
                        
Federal
  
 
1,412
      
2,322
      
1,393
  
State
  
 
693
      
806
      
329
  
Total deferred
  
 
2,105
      
3,128
      
1,722
  
Income tax
expense
 
$
4,402
      
4,122
      
1,611
  
                         
 
The reasons for t
he difference between the expected income tax expense utilizing the federal corporate tax rate of
34%
and the actual income tax expense are as follows:
 
(Dollars in thousands)
  
2017
    
2016
    
2015
  
Expected federal income tax expense
  
$
2,994
      
3,560
      
1,553
  
Items affecting federal income tax:
                        
State
income taxes, net of federal income tax deduction
  
 
529
      
622
      
259
  
Tax exempt interest
  
 
(16
)
    
(16
 )    
(44
 )
Change in federal tax rate
  
 
1,062
      
0
      
0
  
Other, net
  
 
(167
)
    
(44
 )    
(157
 )
Income tax
expense
 
$
4,402
      
4,122
      
1,611
  
                         
 
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows at
December 31:
 
(Dollars in thousands)
  
2017
    
2016
  
Deferred tax assets:
                
Allowances for loan and real estate losses
  
$
2,602
      
4,186
  
Deferred compensation costs
  
 
166
      
262
  
Deferred ESOP loan asset
  
 
487
      
704
  
Nonaccruing loan interest
  
 
221
      
313
  
State net operating loss carryforward
  
 
824
      
1,366
  
Alternative minimum tax credit carryforward
  
 
175
      
118
  
Net unrealized loss on securities available for sale
  
 
372
      
542
  
Other
  
 
92
      
147
  
Total gross deferred tax assets
  
 
4,939
      
7,638
  
                 
Deferred tax liabilities:
                
Deferred loan fees
  
 
37
      
100
  
Premises and equipment basis difference
  
 
380
      
126
  
Originated mortgage servicing rights
  
 
482
      
636
  
Federal tax liability on state net operating loss carryforwards
  
 
280
      
676
  
Other
  
 
88
      
153
  
Total gross deferred tax liabilities
  
 
1,267
      
1,691
  
Net deferred tax assets
  
$
3,672
      
5,947
  
                 
 
The Company has
no
federal net operating loss carryforwards and
$8.7
million of state net operating loss carryforwards at
December 31, 2017
that expire beginning in
2023.
   
 
On
December 22, 2017
the Tax Cuts and Jobs Act became law. Among other things, this law reduced the corporate tax rate for the Company
from
34%
to
21%
effective
January 1, 2018.
In accordance with current accounting guidelines, this change in the tax rate was reflected as an adjustment to the Company’s deferred tax items at
December 31, 2017.
The net result of this adjustment was to reduce the Company’s net deferred tax asset by
$1.1
million with a corresponding increase to income tax expense in the
fourth
quarter of
2017.
 
Retained earnings at
December 31,
20
17
included approximately
$8.8
million for which
no
provision for income taxes was made. This amount represents allocations of income to bad debt deductions for tax purposes. Reduction of amounts so allocated for purposes other than absorbing losses will create income for tax purposes, which will be subject to the then-current corporate income tax rate.
 
The Company considers the determination of the deferred tax asset amount and the need for any valuation reserve
to be a critical accounting policy that requires significant judgment. The Company has, in its judgment, made reasonable assumptions and considered both positive and negative evidence relating to the ultimate realization of deferred tax assets. Positive evidence includes the cumulative net income generated over the prior
three
year period and the probability that taxable income will be generated in future periods. Based upon this evaluation, the Company determined that
no
valuation allowance was required with respect to the net deferred tax assets at
December 31, 2017
and
2016.