Finward Bancorp Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2017

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

Note 7 Income Taxes

At year-end, components of income tax expense/(benefit) consist of the following:

	*(Dollars in thousands)*
	*2017*		*2016*
Federal:
Current	$	1,898	$	2,343
Deferred		275		(129	)
Revaluation of net deferred tax asset		517		-
State:
Current		77		80
Deferred, net of valuation allowance		102		254
Income tax expense	$	2,869	$	2,548

Effective tax rates differ from the federal statutory rate of 34% applied to income before income taxes due to the following:

	*(Dollars in thousands)*
	*2017*			*2016*
Federal statutory rate		34	%		34	%
Tax expense at statutory rate	$	4,022		$	3,975
State tax, net of federal effect		118			220
Tax exempt income		(1,302	)		(1,318	)
Bank owned life insurance		(156	)		(160	)
Captive insurance		(307	)		(179	)
Revaluation of net deferred tax asset		517			-
Other		(23	)		10
Total income tax expense	$	2,869		$	2,548

At December 31, the components of the net deferred tax asset recorded in the consolidated balance sheets are as follows:

	*(Dollars in thousands)*
	*2017*			*2016*
Deferred tax assets:
Bad debts	$	1,885		$	2,872
Deferred loan fees		32			60
Deferred compensation		332			503
Unrealized depreciation on securities available-for-sale, net		-			771
Net operating loss, state		290			294
Tax credits		99			98
Nonaccrual loan interest income		71			109
Share based compensation		133			126
REO writedowns		25			-
Unqualified deferred compensation plan		51			74
Other-than-temporary impairment		57			92
Accrued vacation		59			129
Impairment on land		48			71
Other		15			29
Total deferred tax assets		3,097			5,228

Deferred tax liabilities:
Depreciation		(641	)		(850	)
Prepaids		(237	)		(346	)
Mortgage servicing rights		(26	)		(51	)
Deferred stock dividends		(65	)		(97	)
Unrealized appreciation on securities available-for-sale, net		(188	)		-
Purchase accounting		(100	)		(88	)
Other		(209	)		(181	)
Total deferred tax liabilities		(1,466	)		(1,613	)
Valuation allowance		(80	)		(98	)
Net deferred tax asset	$	1,551		$	3,517

On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law. Among other changes, the Act reduces the corporate federal income tax rate from 34% to 21% effective January 1, 2018. As a result of these changes made by the Act, the Bancorp made the determination to revalue its net deferred tax asset, as deferred tax assets and liabilities are to be measured using enacted rates expected to apply in years in which the deferred tax assets and liabilities are expected to be recovered or settled. The revaluation of the deferred tax assets and liabilities are adjusted through income tax expense in the year the changes in tax laws are enacted. The revaluation of the net deferred tax asset resulted in additional income tax expense of $517 thousand for 2017. The $517 thousand tax expense was $628 thousand net of a tax benefit of $111 thousand relating to the other comprehensive income revaluation adjustment.

At December 31, 2017, the Bancorp has a state net operating loss carry forward of approximately $6.9 million which will begin to expire in 2024 if not used. The Bancorp also has a state tax credit carry forward of approximately $126 thousand which has begun to expire in 2017 and will continue to expire if not used. Management has concluded that the state net operating loss will be fully utilized and therefore no valuation allowance is necessary on the state net operating loss. A valuation allowance remains in place on the state tax credit carryforward. A valuation allowance of $80 thousand and $98 thousand was provided at December 31, 2017 and December 31, 2016, respectively, for the state tax credits.

The Bancorp qualified under provisions of the Internal Revenue Code, to deduct from taxable income a provision for bad debts in excess of the provision for such losses charged to income in the financial statements, if any. Accordingly, retained earnings at December 31, 2017 and 2016 includes, approximately $6.0 million for which no provision for federal income taxes has been made. If, in the future this portion of retained earnings is used for any purpose other than to absorb bad debt losses, federal income taxes would be imposed at the then applicable rate. The unrecorded deferred income tax liability on the above amounts was approximately $1.3 million and $2.0 million at December 31, 2017 and 2016.

The Bancorp had no unrecognized tax benefits at any time during 2017 or 2016 and does not anticipate any significant increase or decrease in unrecognized tax benefits during 2018. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Bancorp's policy to record such accruals through income tax accounts; no such accruals existed at any time during 2017 or 2016.

The Bancorp and its subsidiaries are subject to US Federal income tax as well as income tax of the states of Indiana and Illinois. The Bancorp is no longer subject to examination by taxing authorities for the years before 2014 for federal and 2013 for state.