Note 11 - Federal Income Taxes

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE

11

- FEDERAL INCOME TAXES

The consolidated income tax expense is as follows:

	2016			2015			2014
Current expense	$	15,786,000		$	7,399,000		$	3,359,000
Deferred expense		(699,000	)		4,592,000			4,506,000
Change in valuation allowance		(113,000	)		(180,000	)		0
Tax expense	$	14,974,000		$	11,811,000		$	7,865,000

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:

	2016			2015			2014
Tax at statutory rate (35%)	$	16,410,000		$	13,591,000		$	8,819,000
Increase (decrease) from
Tax-exempt interest		(876,000	)		(781,000	)		(621,000	)
Bank owned life insurance		(440,000	)		(384,000	)		(415,000	)
Change in valuation allowance		(113,000	)		(180,000	)		0
Other		(7,000	)		(435,000	)		82,000
Tax expense	$	14,974,000		$	11,811,000		$	7,865,000

Significant components of deferred tax assets and liabilities as of

December

31,

2016

and

2015

are as follows:

	2016			2015
Deferred income tax assets
Allowance for loan losses	$	6,286,000		$	5,488,000
Deferred compensation		1,175,000			1,367,000
Stock compensation		786,000			767,000
Nonaccrual loan interest income		623,000			602,000
Deferred loan fees		496,000			504,000
Capital loss carryforward		157,000			270,000
Fair value write-downs on foreclosed properties		24,000			115,000
Fair value of interest rate swap		30,000			89,000
Unrealized loss on securities		2,976,000			0
Other		408,000			283,000
Deferred tax asset before valuation allowance		12,961,000			9,485,000
Valuation allowance		(157,000	)		(270,000	)
Deferred tax asset after valuation allowance		12,804,000			9,215,000
Deferred income tax liabilities
Depreciation		928,000			1,128,000
Prepaid expenses		463,000			378,000
Core deposit intangible		3,423,000			4,349,000
Mortgage loan servicing rights		1,940,000			2,142,000
Unrealized gain on securities		0			768,000
Business combination adjustments		2,183,000			1,091,000
Other		199,000			188,000
Deferred tax liability		9,136,000			10,044,000
Total net deferred tax asset (liability)	$	3,668,000		$	(829,000	)

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 such assets will not be realized. At

December

31,

2016

and

2015,

we carried a valuation allowance of

$0.2

million and

$0.3

million, respectively, against capital loss carryforwards generated by the disposal of certain capital investments acquired in our merger with Firstbank. During

2016

and

2015,

we reversed

$0.1

million and

$0.2

million, respectively, of the valuation allowance due to generation of capital gains during the year. The remaining

$0.5

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

2016

or

2015

and do not anticipate any significant increase in unrecognized tax benefits during

2017.

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

2016

or

2015.

Our U.S. federal income tax returns are no longer subject to examination for all years before

2013.