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, 2018

FEDERAL INCOME TAXES [Abstract]

FEDERAL INCOME TAXES

NOTE 14 - FEDERAL INCOME TAXES

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

	2018		2017
Current	$	5,377	$	5,759
Deferred		502		2,450
Change in valuation allowance		92		—
Effect of change in enacted federal income tax rate on deferred items		—		2,524
	$	5,971	$	10,733

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):

	2018			2017
Statutory rate		21	%		35	%
Statutory rate applied to income before taxes	$	6,794		$	9,459
Adjust for:
Tax-exempt interest income		(700	)		(762	)
Bank-owned life insurance		(198	)		(339	)
Amortization of low income housing investment		233			—
Low income housing credit		(131	)		(88	)
Effect of change in enacted federal income tax rate on deferred items		—			2,524
Change in valuation allowance		92			—
Other, net		(119	)		(61	)
	$	5,971		$	10,733

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. At December 31, 2018, a valuation allowance of $92,000 was established for a capital loss carryforward related to the liquidation of assets of a partnership interest the Bank acquired through a loan settlement. Management believes it is more likely than not that all of the remaining deferred tax assets will be realized against deferred tax liabilities and projected future taxable income. No valuation allowance was necessary at December 31, 2017.

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 recorded additional expense of $2.5 million in December 2017 to reflect changes that resulted from the enactment of the Tax Reform Act.

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

	2018			2017
Deferred tax assets
Allowance for loan losses	$	3,544		$	3,486
Nonaccrual loan interest		268			346
Valuation allowance on other real estate owned and property held for sale		218			708
Unrealized loss on securities available for sale		606			417
Other		302			229
Gross deferred tax assets		4,938			5,186
Valuation allowance		(92	)		—
Total net deferred tax assets		4,846			5,186

Deferred tax liabilities
Depreciation	$	(1,005	)	$	(977	)
Prepaid expenses		(200	)		(183	)
Unrealized gain on securities available for sale		—			—
Other		(261	)		(241	)
Gross deferred tax liabilities		(1,466	)		(1,401	)
Net deferred tax asset	$	3,380		$	3,785

There were no unrecognized tax benefits at December 31, 2018 and 2017 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 2014.