Income Taxes

Income taxes for the years ended December 31, 2018, 2017 and 2016 are summarized as follows:



	2018			2017			2016
	(Amounts In Thousands)
Current:
Federal	$	7,783		$	13,770		$	11,650
State	3,093			2,529			2,320
Deferred:
Federal	(1,560		)	3,426			435
State	(411		)	(188		)	(11		)
	$	8,905		$	19,537		$	14,394

Temporary differences between the amounts reported in the consolidated financial statements and the tax basis of assets and liabilities result in deferred taxes. Deferred tax assets and liabilities at December 31, 2018 and 2017 were as follows:



	December 31,
	2018			2017
	(Amounts In Thousands)
Deferred income tax assets:
Allowance for loan losses	$	9,434		$	7,335
Deferred compensation	2,211			2,202
Unrealized losses on interest rate swaps	398			703
Accrued expenses	668			688
State net operating loss	795			836
Unrealized losses on investment securities	682			285
Gross deferred tax assets	$	14,188		$	12,049
Valuation allowance	(795		)	(836		)
Deferred tax asset, net of valuation allowance	$	13,393		$	11,213
Deferred income tax liabilities:
Property and equipment	1,728			1,652
Goodwill	407			407
Other	389			348
Gross deferred tax liabilities	$	2,524		$	2,407
Net deferred tax assets	$	10,869		$	8,806

The Company has recorded a deferred tax asset for the future tax benefits of Iowa net operating loss carry-forwards. The net operating loss carry-forwards are generated by the Company largely from its investment in tax credit real estate properties. The Company is required to file a separate Iowa tax return and cannot be consolidated with the Bank. The net operating loss carry-forwards will expire, if not utilized, between 2019 and 2037. The Company has recorded a valuation allowance to reduce the deferred tax asset attributable to the net operating loss carry-forwards. At December 31, 2018 and 2017, the Company believes it is more likely than not that the Iowa net operating loss carry-forwards will not be realized. The decrease in net operating loss carry-forward in 2018 compared to 2017 reflects expiring carry-forwards. A valuation allowance related to the remaining deferred tax assets has not been provided because management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. The valuation allowance (decreased) increased by ($41,000) and $57,000 for the years ended December 31, 2018 and 2017, respectively.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code that affected 2017, including, but not limited to, accelerated depreciation that allows for full expensing of qualified property. The Tax Act also established new tax laws that affects 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provided that a measurement period should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.

As a result of the reduction of the federal corporate income tax rate, we revalued our net deferred tax asset, excluding after tax credits, as of December 22, 2017. Based on this revaluation, we recorded a net tax expense of $4.71 million to reduce the net deferred tax asset balance, which was recorded as additional income tax expense for the year ended December 31, 2017. Our effective tax rate increased by 30.99% to 41.0% primarily as a result of the revaluation of our net deferred tax asset for the year ended December 31, 2017.

The net change in the deferred income taxes for the years ended December 31, 2018, 2017 and 2016 is reflected in the consolidated financial statements as follows:



	Year Ended December 31,
	2018		2017			2016
	(Amounts In Thousands)
Consolidated statements of income	$	1,971	$	(3,238	)	$	(424	)
Consolidated statements of stockholders' equity	92		(567		)	1,340
	$	2,063	$	(3,805	)	$	916

Income tax expense for the years ended December 31, 2018, 2017 and 2016 are less than the amounts computed by applying the maximum effective federal income tax rate to the income before income taxes because of the following items:



	2018					2017					2016
	Amount			% Of Pretax Income		Amount			% Of Pretax Income		Amount			% Of Pretax Income
	(Amounts In Thousands)
Expected tax expense	$	9,591		21.0	%	$	16,659		35.0	%	$	16,082		35.0	%
Tax-exempt interest	(1,122		)	(2.5	)	(1,771		)	(3.7	)	(1,715		)	(3.7	)
Interest expense limitation	87			0.2		103			0.2		96			0.2
State income taxes, net of federal income tax benefit	2,119			4.6		1,522			3.2		1,501			3.2
Income tax credits	(1,292		)	(2.8	)	(1,426		)	(3.0	)	(1,426		)	(3.1	)
Deferred tax asset revaluation	—			—		4,710			9.9		—			—
Other	(478		)	(1.0	)	(260		)	(0.6	)	(144		)	(0.3	)
	$	8,905		19.5	%	$	19,537		41.0	%	$	14,394		31.3	%

Federal income tax expense for the years ended December 31, 2018, 2017 and 2016 was computed using the consolidated effective federal tax rate. The Company also recognized income tax expense pertaining to state franchise taxes payable individually by the subsidiary bank. The Company files a consolidated tax return for federal purposes and separate tax returns for the State of Iowa purposes. The tax years ended December 31, 2018, 2017, 2016 and 2015, remain subject to examination by the Internal Revenue Service. For state tax purposes, the tax years ended December 31, 2018, 2017, 2016 and 2015, remain open for examination. There were no material unrecognized tax benefits at December 31, 2018 and December 31, 2017. No interest or penalties on these unrecognized tax benefits has been recorded. As of December 31, 2018, the Company does not anticipate any significant increase or decrease in unrecognized tax benefits during the twelve month period ending December 31, 2019.