Note 11 - Federal Income Taxes

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

Income Tax Disclosure [Text Block]

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

.