Income Taxes

Income tax expense for the years ended December 31, 2017, 2016 and 2015 consists of the following:



	Year Ended December 31,
	2017		2016			2015
	(In Thousands)
Current:
Federal	$	131	$	2,839		$	5,881
State	448		425			1,338
Current tax expense	579		3,264			7,219
Deferred:
Federal	1,657		(1,000		)	1,036
State	90		(108		)	122
Deferred tax expense (benefit)	1,747		(1,108		)	1,158
Total income tax expense	$	2,326	$	2,156		$	8,377

Deferred income tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax basis. Deferred tax assets and liabilities are measured using enacted tax rates to apply to taxable income in the period in which the temporary differences are expected to be recovered or settled. Effective January 1, 2018, the enactment of the Tax Cuts and Jobs Act (the “Act”) reduced the corporate federal income tax rate to 21% from 35%, which required the Corporation to revalue its deferred taxes as of December 31, 2017. The revaluation resulted in a $629,000 reduction to the Corporation’s net deferred tax assets with a corresponding increase to income tax expense. Net deferred tax assets are included in accrued interest receivable and other assets in the Consolidated Balance Sheets.

On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the Act’s impact. SAB 118 provides a measurement period, which in no case should extend beyond one year from the Act’s enactment, during which a company acting in good faith may complete the accounting for the impacts of the Act. In accordance with SAB 118, a company will reflect the income tax effects of the Act in the reporting period in which the accounting is complete. The Corporation's accounting for the impact on its net deferred tax assets was based upon reasonable estimates of the tax effects of the Act; however, its estimates may change upon the finalization of its implementation and additional interpretive guidance from regulatory authorities. Among other things, the Corporation needs to obtain year-end partnership statements. While we currently do not expect our estimate to materially change, the Corporation will complete its accounting for the Act during 2018 as provided in SAB 118 and will reflect any adjustments to its provisional amounts as an adjustment to the provision for taxes in the reporting period in which the amounts are finally determined.

The significant components of the Corporation’s deferred tax assets and liabilities were as follows:



	December 31, 2017		December 31, 2016
	(In Thousands)
Deferred tax assets:
Allowance for loan and lease losses	$	4,795	$	8,177
SBA recourse reserve	729		720
Excess book basis over tax basis for net assets acquired	96		336
Deferred compensation	482		951
State net operating loss carryforwards	615		548
Non-accrual loan interest	942		815
Capital loss carryforwards	21		32
Unrealized losses on securities	423		349
Other	354		394
Total deferred tax assets before valuation allowance	8,457		12,322
Valuation allowance	—		—
Total deferred tax assets	8,457		12,322
Deferred tax liabilities:
Leasing and fixed asset activities	5,338		7,389
Loan servicing asset	471		780
Other	64		101
Total deferred tax liabilities	5,873		8,270
Net deferred tax asset	$	2,584	$	4,052

The tax effects of unrealized gains and losses on securities are components of other comprehensive income. A reconciliation of the change in net deferred tax assets to deferred tax expense as of December 31, 2017, 2016 and 2015 was as follows:



	December 31, 2017			December 31, 2016			December 31, 2015
	(In Thousands)
Change in net deferred tax assets	$	(1,468	)	$	1,419		$	(970	)
Deferred taxes allocated to other comprehensive income	(279		)	(311		)	(188		)
Deferred income tax (expense) benefit	$	(1,747	)	$	1,108		$	(1,158	)

Realization of the deferred tax asset over time is dependent upon the Corporation generating sufficient taxable earnings in future periods. In making the determination that the realization of the deferred tax was more likely than not, the Corporation considered several factors including its recent earnings history, its expected earnings in the future, appropriate tax planning strategies and expiration dates associated with operating loss carry forwards.

The Corporation had state net operating loss carryforwards of approximately $9.9 million and $10.7 million at December 31, 2017 and 2016, respectively, which can be used to offset future state taxable income. The Corporation believes it will be able to fully utilize its Wisconsin state net operating losses under this law and therefore no valuation allowance has been established as of December 31, 2017.

The provision for income taxes differs from that computed at the federal statutory corporate tax rate as follows:



	Year Ended December 31,
	2017			2016			2015
	(Dollars in Thousands)
Income before income tax expense	$	14,231		$	17,065		$	24,891
Tax expense at statutory federal rate of 35.00%, 35.00% and 34.42% applied to income before income tax expense, respectively	$	4,981		$	5,973		$	8,568
State income tax, net of federal effect	511			206			968
Tax-exempt security and loan income, net of TEFRA adjustments	(1,045		)	(1,114		)	(879		)
Bank-owned life insurance	(438		)	(341		)	(330		)
Tax credits, net	(2,390		)	(2,696		)	(246		)
Deferred tax revaluation adjustment	629			—			—
Other	78			128			296
Total income tax expense	$	2,326		$	2,156		$	8,377
Effective tax rate	16.34		%	12.63		%	33.65		%

There were no uncertain tax positions outstanding as of December 31, 2017 and 2016. As of December 31, 2017, tax years remaining open for the State of Wisconsin tax were 2013 through 2016. Federal tax years that remained open were 2014 through 2016. As of December 31, 2017, there were also no unrecognized tax benefits that are expected to significantly increase or decrease within the next twelve months.