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, 2015

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)
	2015			2014
Federal:
Current	$	2,387		$	1,787
Deferred		(527	)		88
State:
Current		79			50
Deferred, net of valuation allowance		82			228
Removal of valuation allowance on state NOL, net		(223	)		-
Income tax expense	$	1,798		$	2,153

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

	(Dollars in thousands)
	2015			2014
Federal statutory rate		34	%		34	%
Tax expense at statutory rate	$	3,281		$	3,246
State tax, net of federal effect		106			183
Tax exempt income		(1,271	)		(1,184	)
Bank owned life insurance		(150	)		(142	)
Removal of valuation allowance on state NOL, net		(223	)		-
Other		55			50
Total income tax expense	$	1,798		$	2,153

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

	(Dollars in thousands)
	2015			2014
Deferred tax assets:
Bad debts	$	2,591		$	2,372
Deferred loan fees		65			73
Deferred compensation		498			484
Net operating loss, state		449			557
Tax credits		91			85
Nonaccrual loan interest income		53			62
Restricted stock awards		39			43
REO writedowns		12			24
Unqualified deferred compensation plan		70			63
Post retirement benefit		47			52
Other-than-temporary impairment		92			92
Accrued vacation		116			98
Impairment on land		71			71
Purchase accounting		21			47
Other		28			1
Total deferred tax assets		4,243			4,124

Deferred tax liabilities:
Depreciation		(901	)		(1,034	)
Prepaids		(133	)		(337	)
Mortgage servicing rights		(60	)		(79	)
Deferred stock dividends		(97	)		(109	)
Unrealized appreciation on securities available-for-sale, net		(722	)		(826	)
Post retirement unrealized gain		(20	)		(23	)
Other		(90	)		(105	)
Total deferred tax liabilities		(2,023	)		(2,513	)
Valuation allowance		(91	)		(257	)
Net deferred tax asset	$	2,129		$	1,354

At December 31, 2015, the Bancorp has a state net operating loss carry forward of approximately $10.2 million which will begin to expire in 2022 if not used. The Bancorp also has a state tax credit carry forward of approximately $139 thousand which will begin to expire in 2017 if not used. Management concluded in 2015 that the state net operating loss will be fully utilized prior to expiration and is reversing the portion of the valuation allowance that was in place on the state net operating loss. A valuation allowance remains in place on the state tax credit carryforward. A valuation allowance of $91 thousand was provided at December 31, 2015 for the state tax credit and of $257 thousand at December 31, 2014 for the state net operating loss and the state tax credit.

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, 2015 and 2014 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 $2.0 million at December 31, 2015 and 2014.

The Bancorp had no unrecognized tax benefits at any time during 2015 or 2014 and does not anticipate any significant increase or decrease in unrecognized tax benefits during 2016. 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 2015 or 2014.

The Bancorp and its subsidiaries are subject to US Federal income tax as well as income tax of the states of Indiana and Illinois.