Macatawa Bank Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

FEDERAL INCOME TAXES

FEDERAL INCOME TAXES

12 Months Ended

Dec. 31, 2017

FEDERAL INCOME TAXES [Abstract]

FEDERAL INCOME TAXES

NOTE 14 - FEDERAL INCOME TAXES

Income tax expense was as follows (dollars in thousands):

	2017		2016		2015
Current	$	5,759	$	5,289	$	2,335
Deferred		2,450		942		3,291
Effect of change in enacted federal income tax rate on deferred items		2,524		---		---
	$	10,733	$	6,231	$	5,626

The difference between the financial statement tax expense and amount computed by applying the statutory federal tax rate to pretax income was reconciled as follows (dollars in thousands):

	2017			2016			2015
Statutory rate		35	%		35	%		35	%
Statutory rate applied to income before taxes	$	9,459		$	7,764		$	6,447
Adjust for:
Tax-exempt interest income		(762	)		(620	)		(529	)
Bank-owned life insurance		(339	)		(342	)		(232	)
Tax return credits and other adjustments		(5	)		(513	)		---
Effect of change in enacted federal income tax rate on deferred items		2,524			---			---
Other, net		(144	)		(58	)		(60	)
	$	10,733		$	6,231		$	5,626

The realization of deferred tax assets (net of a recorded valuation allowance) is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carryback losses to available tax years. In assessing the need for a valuation allowance, we consider positive and negative evidence, including taxable income in carry-back years, scheduled reversals of deferred tax liabilities, expected future taxable income and tax planning strategies. No valuation allowance was necessary at December 31, 2017, 2016 or 2015.

Legislation H.R. 1, formerly known as "Tax Cuts and Jobs Act" (the Tax Reform Act") was enacted on December 22, 2017. The Tax Reform Act reduced the corporate income tax rate to 21% effective January 1, 2018 and changed certain other provisions. Accounting guidance requires the Company to remeasure its deferred tax assets and deferred tax liabilities on the date of enactment using the new enacted tax rate of 21%. The Company has recorded additional expense of $2.5 million to reflect changes that resulted from the enactment of the Tax Reform Act.

Concurrent with the enactment of the Tax Reform Act, the SEC staff issued SAB 118, which allows companies to recognize the cumulative impact of the income tax effects triggered by the enactment of the new law over a period of up to 12 months in the reporting period in which the adjustment is identified. The Company will apply SAB 118 and continue to refine the measurement of its net deferred tax balance on December 22, 2017 during the preparation of its 2017 tax return as additional guidance and information becomes available.

The net deferred tax asset recorded included the following amounts of deferred tax assets and liabilities (dollars in thousands):

	2017			2016
Deferred tax assets
Allowance for loan losses	$	3,486		$	5,937
Nonaccrual loan interest		346			718
Valuation allowance on other real estate owned		708			3,714
Unrealized loss on securities available for sale		417			799
Other		229			176
Gross deferred tax assets		5,186			11,344
Valuation allowance		---			---
Total net deferred tax assets		5,186			11,344

Deferred tax liabilities
Depreciation		(977	)		(1,705	)
Prepaid expenses		(183	)		(399	)
Unrealized gain on securities available for sale		---			---
Other		(241	)		(377	)
Gross deferred tax liabilities		(1,401	)		(2,481	)
Net deferred tax asset	$	3,785		$	8,863

There were no unrecognized tax benefits at December 31, 2017 or 2016 and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. The Company is no longer subject to examination by the Internal Revenue Service for years before 2013.