Note 9. Income Taxes

The Tax Reform Act was enacted on December 22, 2017. The Tax Reform Act reduces the US federal corporate tax rate from 34% to 21%. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Tax Reform Act. As described below, we have made a reasonable estimate of the effects on our existing deferred tax balances as of December 31, 2017. We re-measured all of our deferred tax assets (“DTA”) and liabilities (“DTL”) based on the rates at which they are expected to reverse in the future. We recognized an income tax expense of $0.6 million for the year ended December 31, 2017 related to adjusting our net deferred tax asset balance to reflect the new corporate tax rate.

In addition, DTAs/DTLs related to AFS securities unrealized losses that were revalued as of December 31, 2017 noted above created a “stranded tax effects” in Accumulated Other Comprehensive Income (“AOCI”) due enactment of the Tax Act. The issue arose due to the nature of GAAP recognition of tax rate change effects on the AFS DTA/DTL revaluation as an adjustment to income tax provision.

In February 2018, FASB issued ASU 2018-02 - Income Statement - Reporting Comprehensive Income (Topic 220). As disclosed in Note 1, the Company early adopted the provisions of the ASU 2018-02 and recorded a reclassification adjustment of $104,000 from AOCI to retained earnings for stranded tax effects related to AFS securities resulting from the newly enacted corporate tax rate. The amount of the reclassification was the difference between the 34 percent historical corporate tax rate and the newly enacted 21 percent corporate tax rate. See Statement of Changes in Stockholders Equity for additional details and reclassification impact due to impact of the ASU 2018-02.

The components of income tax expense (benefit) are as follows for the years ended December 31, 2017 and 2016:


	2017		2016
(dollars in thousands)
Current income tax expense:
Federal	$	328	$	38
State		143		26

Total current tax expense		471		64

Deferred income tax expense (benefit) :
Federal (1)		443		(185)
State		(1)		38

Total deferred tax expense (benefit)		442		(147)

Total Income tax expense (benefit)	$	913	$	(83)

(1)

Provisional revaluation of federal deferred tax assets and liabilities.

A reconciliation of income tax expense computed at the statutory rate of 34% to the actual income tax expense for the years ended December 31, 2017 and 2016 is as follows:


	2017		2016
(dollars in thousands)
Income tax expense at federal statutory rate	$	620	$	346
Increase (decrease) resulting from:
Tax-exempt income		(341)		(309)
Bank owned life insureance		(68)		(148)
State income taxes, net of Federal income tax benefit		93		42
Federal rate change (1)		592		—
Other		17		(14)
Total income tax expense (benefit)	$	913	$	(83)

(1)

Provisional revaluation of federal deferred tax assets and liabilities.

Deferred tax assets and liabilities resulting from the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes at December 31, 2017 and 2016 are as follows:


	2017		2016
(dollars in thousands)
Deferred income tax benefits:
Accrued deferred compensation	$	92	$	146
Allowance for credit losses		7		95
Nonaccrual interest		375		445
Alternative minimum tax credits		1,191		967
Net operating loss carryforward credits		297		665
Accumulated depreciation		(15)		54
Other real estate owned		3		18
Reserve for unfunded commitments		7		10
Other temporary differences		20		22
Accumulated securities premium accretion		213		211
Net unrealized depreciation on investment securities available for sale		239		527

Net deferred income tax benefits	$	2,429	$	3,160

Management has determined that no valuation allowance is required as it believes it is more likely than not that all of the deferred tax assets will be fully realizable in the future. At December 31, 2017 and 2016, management believes there are no uncertain tax positions under ASC Topic 740 Income Taxes (formerly FIN 48, Accounting for Uncertainty in Income Taxes).

Income tax expense was $0.91 million and ($0.08) million at December 2017 and 2016, respectively. Included in the 2017 was a one-time $0.60 million income tax expense due to the Tax Reform Act which required us to revalue our deferred tax assets and liabilities at the new statutory tax rate upon enactment.