MACKINAC FINANCIAL CORP /MI/

NOTE 11 — INCOME TAXES

The components of the federal income tax provision (credit) for the years ended December 31 are as follows (dollars in thousands):


	2017		2016		2015
Current tax expense	$	585	$	485	$	—
Change in valuation allowance		—		—		(760)
Adjustment of deferred taxes due to change in enacted tax rate		2,025		—		—
Deferred tax expense		2,929		1,798		3,093

Provision for income taxes	$	5,539	$	2,283	$	2,333

A summary of the source of differences between income taxes at the federal statutory rate and the provision (credit) for income taxes for the years ended December 31 is as follows (dollars in thousands):


	2017		2016		2015
Tax expense at statutory rate	$	3,746	$	2,301	$	2,695
Increase (decrease) in taxes resulting from:
Tax-exempt interest		(133)		(96)		(60)
Change in valuation allowance		—		—		(760)
Adjustment of deferred taxes due to change in enacted tax rate		2,025		—		—
Expiration of deferred tax assets		—		—		429
Nondeductible transaction expenses		17		95		—
Other		(116)		(17)		29

Provision for income taxes, as reported	$	5,539	$	2,283	$	2,333

Deferred income taxes are provided for the temporary differences between the financial reporting and tax bases of the Corporation’s assets and liabilities. The major components of net deferred tax assets at December 31 are as follows (dollars in thousands):


	2017		2016
Deferred tax assets:
NOL carryforward	$	1,580	$	3,080
Allowance for loan losses		948		1,413
Alternative Minimum Tax Credit		1,463		1,944
OREO		119		142
Tax credit carryovers		235		235
Deferred compensation		242		443
Pension liability		240		387
Stock compensation		79		116
Unrealized loss on securities		19		52
Purchase accounting adjustments		785		1,791
Other		63		805

Total deferred tax assets		5,773		10,408


Deferred tax liabilities:
Core deposit premium		(404)		(739)
FHLB stock dividend		(56)		(91)
Depreciation		(79)		(208)
Mortgage servicing rights		(240)		(583)
Other		(24)		(27)
Total deferred tax liabilities		(803)		(1,648)

Net deferred tax asset	$	4,970	$	8,760

The Corporation has reported net deferred tax assets of $4.970 million at December 31, 2017. The income tax expense for 2017 was impacted by the adjustment of deferred tax assets and liabilities related to the reduction in the U.S. federal statutory income tax rate to 21% under the Tax Cuts and Jobs Act, which was enacted on December 22, 2017. As a result of the new law, and additional expense of $2.025 million was recorded in 2017. A valuation allowance is provided against deferred tax assets when it is more likely than not that some or all of the deferred tax asset will not be realized. The Corporation, as of December 31, 2017 had a net operating loss and tax credit carryforwards for tax purposes of approximately $7.5 million, and $1.7 million, respectively. The Corporation evaluated the future benefits from these carryforwards as of December 31, 2017 and determined that it was “more likely than not” that they would be utilized prior to expiration. The net operating loss carryforwards expire twenty years from the date they originated. These carryforwards, if not utilized, will begin to expire in the year 2023. A portion of the NOL and credit carryforwards are subject to the limitations for utilization as set forth in Section 382 of the Internal Revenue Code. The annual limitation is $1.537 million for the NOL and the equivalent value of tax credits, which is approximately $.476 million. These limitations for use were established in conjunction with the recapitalization of the Corporation in December 2004. The Corporation will continue to evaluate the future benefits from these carryforwards in order to determine if any adjustment to the deferred tax asset is warranted.